fomc 19920818 g bpt 219920813

111
Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the best- preserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

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Page 1: Fomc 19920818 g Bpt 219920813

Prefatory Note

The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the best-preserved paper copies, scanning those copies,1 and then making the scanned versions text-searchable.2 Though a stringent quality assurance process was employed, some imperfections may remain.

Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

Page 2: Fomc 19920818 g Bpt 219920813

Confidential (FR) Class III FOMC

August 13, 1992

RECENT DEVELOPMENTS

Prepared for the Federal Open Market Committee

By the staff of the Board of Governors of the Federal Reserve System

Page 3: Fomc 19920818 g Bpt 219920813

CONTENTS

II DOMESTIC NONFINANCIAL DEVELOPMENTSEmployment and unemployment.......................................Industrial production......................... .................. . .. 5Personal income and consumption ................................... 9Housing markets........................ ...... .................... . 15Business fixed investment.......................................... 17Business inventories................................ ............. 23Federal sector..................................................... 27State and local government sector.................................. 31Labor costs......................... ................ ............. 33Prices...................................... . ... .................. 39

TablesChanges in employment............................................. 2Unemployment and labor force participation rates.................. 2Production of domestic autos and trucks........................... 5Growth in selected components of industrial production............. 6Capacity utilization.............................................. 6Personal income......... ......................... .. ............... 8Real personal consumption expenditures............................. 8Retail sales................................................... ... . 12Sales of automobiles and light trucks................... . ..... .... 13Private housing activity........................................... 14Business capital spending indicators............................... 18Changes in manufacturing and trade inventories.................... 24Inventories relative to sales..................................... 24Federal government outlays and receipts.......................... 26Administration policy budget projections ............................ 28Administration economic assumptions... .......................... . 28CBO budget estimates. ...................................... ...... 30CBO economic assumptions .......................................... 30Employment cost index ............................................. 34Changes in negotiated wage and compensation rates under

major collective bargaining settlements....................... 37Effective wage change in major union contracts

and components of change...................................... 37Recent changes in consumer prices ................. ................... 38Recent changes in producer prices................................. 38Monthly average prices--West Texas Intermediate .................. 40Inflation rates excluding food and energy........................ 42Price indexes for commodities and materials....................... 44

ChartsLabor market indicators........................................... 4Manufacturing sector indicators................................... 7Personal consumption expenditures, and consumer attitudes......... 10Private housing starts............................................ 14Mortgage Bankers Association purchase index and new home sales.... 16Recent data on orders and shipments............................... 20Real PDE aircraft outlays, total Boeing domestic orders, and real

equipment investment and cash flow............................ 21Nonresidential construction and selected indicators................ 22Ratio of inventories to sales...................................... 25State and local sector ............................................ 32

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ii

Employment cost index.............................................. 36Compensation in union contracts ................................... 37Daily spot and posted prices of West Texas Intermediate........... 40Index weights................... .................................... 44Commodity price measures .. ........ ............................... 46

III DOMESTIC FINANCIAL DEVELOPMENTSMonetary aggregates and bank credit............................... 3Business finance ..................... .............................. 9Treasury and sponsored agency financing........................... 13Municipal securities.............................................. . 14Mortgage markets .................................................. 17Consumer credit. . ............................. ..................... 21

TablesMonetary aggregates............................................... 2Commercial bank credit and short- and intermediate-term

business credit................ ... .............................. 4Gross offerings of securities by U.S. corporations.................. 8Treasury and agency financing..................................... 12Gross offerings of municipal securities ........................... 15Standard and Poor's municipal long-term debt rating actions....... 16Mortgage-backed security issuance.................................... 20Consumer credit.................................................... 22Consumer interest rates.............................................. . 22

ChartsLoans at weekly reporting banks selected by capital status........ 6Gross interest payments to cash flow .............................. 10Refinancing indexes, and FRM to ARM spread vs.

one-year ARM discount........................................ . 18Gross public issuance of consumer asset-backed securities......... 24

IV INTERNATIONAL DEVELOPMENTSMerchandise trade.................................. ................ 1Prices of exports and non-oil imports ............................. 4U.S. international financial transactions.......................... 6Foreign exchange markets .......................................... 10Developments in foreign industrial countries..................... 13Developents in East European countries and Russia................ 24Economic situation in other countries ............................. 25

TablesU.S. merchandise trade: Monthly data.................. ......... ... 1Major trade categories............................................ 2Oil imports.......... ............................................... 4Export and import price measures..................................... 5Summary of U.S. international transactions......................... 7International banking data......................................... 9Major industrial countries

Real GNP and industrial production... .... ............... ...... 15Consumer and wholesale prices................................... 16Trade and current account balances ..................... ........ 17

Weighted average exchange value of the dollar.....................Weighted average exchange value of the dollar..................... 12

Page 5: Fomc 19920818 g Bpt 219920813

DOMESTIC NONFINANCIALDEVELOPMENTS

Page 6: Fomc 19920818 g Bpt 219920813

DOMESTIC NONFINANCIAL DEVELOPMENTS

The economic expansion appears to have continued at a tepid

pace into the summer. Private final demand appears to be picking up

after a lackluster second quarter: Sales of motor vehicles firmed,

on balance, in June and July, shipments of business equipment have

strengthened, and non-auto retail sales in July more than reversed

the June decline. Falling mortgage rates appear to have spawned a

wave of refinancings, and housing demand also may be improving. But

employment and industrial production have grown little, on net,

since May, and the unemployment rate has moved up further. Recent

reports on prices and labor costs have been quite favorable.

Employment and Unemployment

The labor market reports for June and July suggest that labor

demand has been quite sluggish. Although total payroll employment

increased 135,000 between May and July, about half of the rise

reflected temporary hiring associated with the federally sponsored

summer jobs program enacted in June. Apart from this program,

most of the gain in employment between May and July reflected

moderate increases in services industries; in contrast, both

manufacturing and construction shed workers over this period. The

average workweek of production or nonsupervisory workers moved down

in June to the bottom of the range seen this year and remained at

this level in July. As a result, aggregate hours of production

workers in July stood a touch below the second-quarter average.

1. At this point, BLS estimates that the summer jobs programboosted payrolls 75,000 through the July survey week. However, theresponse rate of local government employment offices to the July

payroll survey was unusually low, and late reports could inflate thecurrent estimate of the jobs created by the program last month (and,along with it, the rise in total state and local employment).Another increase in summer jobs could show up in the Augustemployment report, as hiring continued after the July survey week.Most of these employees, however, should be off payrolls inSeptember.

II-1

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II-2

CHANGES IN EMPLOYMENT 1(Thousands of employees; based on seasonally adjusted data)

1991 1992 19921990 1991 Q4 Q1 Q2 May June July

------------ Average monthly changes ----------

Nonfarm payroll employment2 -5 -79 -46 15 78 119 -63 198

Private -34 -91 -67 -4 58 115 -82 110Manufacturing -47 -36 -28 -17 -18 -4 -52 1

Durable -36 -33 -30 -16 -18 -11 -36 -26Nondurable -11 -3 2 -1 0 7 -16 27

Construction -23 -26 -23 4 0 27 -29 -15Retail trade -8 -35 -36 -7 20 -27 1 35Finance, insurance, real estate -1 -3 2 2 -1 -1 -10 -3Services 44 30 36 28 72 126 27 110Health services 31 29 29 16 20 25 11 36Business services 0 3, 13 11 40 45 16 21

Total government 29 12 21 19 19 4 19 88

Private nonfarm production workers -40 -76 -54 18 91 110 -23 57Manufacturing production workers -39 -23 -15 1 -9 -2 -31 9

Total employment3 -32 -62 -120 207 75 -19 -82 198Nonagricultural -39 -54 -87 203 56 13 -156 246

Memo:Aggregate hours of production

or nonsupervisory workers .0 -.1 .0 .1 .0 .8 -.7Average workweek (hours) 34.5 34.3 34.4 34.5 34.4 34.6 34.3 34.3

1. Average change from final month of preceding period to final month of periodindicated.

2. Survey of establishments.3. Survey of households.

UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES(Percent; seasonally adjusted)

1991 1992 19921990 1991 Q4 Q1 Q2 May June July

Civilian unemployment rate(16 years and older) 5.5 6.7 6.9 7.2 7.5 7.5 7.8 7.7

Teenagers 15.5 18.7 19.0 19.6 21.0 20.0 23.6 21.020-24 years old 8.8 10.8 11.4 11.1 11.3 11.8 11.1 11.7Men. 25 years and older 4.4 5.7 5.8 6.3 6.5 6.5 6.8 6.5Women, 25 years and older 4.3 5.1 5.3 5.6 5.8 5.6 5.9 5.9

Labor force participation rate 66.4 66.0 65.9 66.2 66.5 66.5 66.6 66.6

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II-3

The survey of households supports the picture of a lethargic

labor market provided by the payroll survey. Total household

employment rose 116,000 on net in June and July, similar to the

modest net increase in nonfarm payrolls. At the same time, the

civilian labor force rose nearly 400,000 in June--the seventh

straight month with a notable increase--and then held about steady

in July. The resulting jump in the unemployment rate to an average

of 7-3/4 percent in June and July may have been overstated somewhat

by difficulties in seasonally adjusting the flow of young persons

into the labor market in early summer. Even so, most of the recent

rise in the jobless rate appears to reflect a genuine shortfall of

job creation relative to a pickup in labor supply.

Other indicators from the household survey suggest no material

change in labor market conditions over the past two months. The

share of the labor force working part time for economic reasons

fluctuated in June and July but remained around the relatively high

proportion recorded earlier this year. Similarly, the share of the

unemployed who are job losers edged down in June and July, but these

changes were fairly small compared with the usual monthly variation

in the series.

Initial claims for unemployment insurance, which had held

between 410,000 and 430,000 during June and the first three weeks of

July, jumped to nearly 480,000 during the week of July 25, and then

dropped back to 411,000 the following week. The increase in late

July was the result of layoffs associated with General Motors' two-

week shutdown and provided little information about conditions in

the labor market. 2

2. The GM shutdown likely will cause claims to spike up againin the week ending August 8, reflecting the delayed processing of

the filings in Michigan.

Page 9: Fomc 19920818 g Bpt 219920813

II-4

LABOR MARKET INDICATORS

Civilian Unemployment RatePercent

Job Losers as a Share of UnemploymentPercent

Initial Claims for Unemployment InsuranceThousands

All regular programs

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Page 10: Fomc 19920818 g Bpt 219920813

II-5

Industrial Production

Industrial production is estimated to have increased

0.4 percent in July, retracing the June decline. (THESE DATA ARE

CONFIDENTIAL UNTIL RELEASED AT 9:15 A.M. ON AUGUST 14.) Much of the

pickup in July stemmed from increases in mining and utilities, where

special factors had held down output in earlier months. Electricity

generation, which had been weak in recent months, jumped in July.

In addition, coal output rebounded early last month with the

resumption of ore shipments after the rail strike. Manufacturing

output was unchanged in July after declining 0.2 percent in June.

Production of motor vehicles and parts was a negative for IP

again in July; motor vehicle assemblies fell to 9.4 million units at

an annual rate (FRB seasonals). Current production schedules call

for domestic auto and truck assemblies to increase to about a

10-1/2 million unit rate in August and to remain near that pace in

September. Inventories of domestic light vehicles appear to have

been reasonably well aligned with sales at the end of July. Barring

a significant weakening of sales from the July pace, the scheduled

rise in assemblies seems fairly realistic.

PRODUCTION OF DOMESTIC AUTOS AND TRUCKS(Millions of units at an annual rate; FRB seasonal basis)

1992 1992Q1 Q2 June July Aug. Sep. Q3

------- actual--------- ---- scheduled---

Domestic production 8.8 10.0 9.9 9.4 10.5 10.3 10.1Autos 5.2 6.1 6.1 5.7 6.4 6.3 6.1Trucks 3.6 3.9 3.8 3.7 4.1 4.1 4.0

Apart from motor vehicles, manufacturing output declined

0.1 percent in June and is estimated to have risen by a similar

amount in July. Production of consumer durable goods, excluding

motor vehicles, declined in both months, while output of consumer

Page 11: Fomc 19920818 g Bpt 219920813

II-6

GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION(Percent change from preceding comparable period)

Proportion 1992 1992in

totalIP

1991:Q4 19911 Q1 Q2 May June July

-Annual Rate-- ----- Monthly Rate-----

Total index 100.0 -.5 -2.9 5.2 .7 -.4 .4Previous -.5 -2.9 4.5 .5 -.3

Motor vehicles and parts 4.2 8.5 -20.0 44.0 4.2 -2.4 -3.3

EXCLUDING MOTOR VEHICLESAND PARTS:

Total index 95.8 -.9 -2.1 3.8 .5 -.3 .6Products, total 57.1 -1.3 -1.4 2.2 .3 -.3 .4

Final products 42.9 -.9 -2.1 2.9 .2 -.3 .2Consumer goods 25.0 2.0 -1.2 2.8 .2 -.3 .3Durables 3.7 3.2 3.1 10.1 2.4 -.4 -.7Nondurables 20.9 1.8 -2.1 1.6 -.2 -.3 .5

Excluding energy 18.2 1.7 -.7 .9 -.2 -.2 .2

Business equipment 14.6 -1.9 -1.7 7.9 1.0 .2 .2Office and computing 2.8 4.2 13.2 22.0 1.4 2.1 2.3Industrial 3.9 -8.7 -12.1 6.4 1.8 -.7 .3Other 7.9 -.2 -1.3 3.7 .4 -.1 -.6

Defense and space equip. 4.4 -8.0 -10.9 -9.1 -.5 -.8 -1.6

Intermediate products 14.2 -2.3 .8 .1 .6 -.5 .8Construction supplies 5.3 -6.4 2.7 4.5 1.4 -.9 .3

Materials 38.7 -.2 -3.2 6.3 .9 -.2 .9Durables 18.2 -1.8 -1.7 6.3 1.3 -.2 .3Nondurables 9.0 2.3 -1.4 8.9 .3 1.1 .1Energy 10.2 .0 -6.0 2.2 .1 -1.3 3.0

Memo:Manufacturing excluding

motor vehicles and parts 80.8 -.8 -1.1 3.8 .6 -.1 .1Mining 7.3 -3.3 -7.1 4.9 .8 -1.6 2.8Utilities 7.7 1.0 -8.5 2.7 -.3 -.7 3.5

1. From the final quarter of the previous period to the final quarter of the periodindicated.

CAPACITY UTILIZATION(Percent of capacity; seasonally adjusted)

1967-91 1990 1992 1992

Avg. July Q1 Q2 May June July

Total industry 82.1 83.8 78.2 78.8 79.1 78.7 78.9

Manufacturing 81.4 83.1 77.3 77.9 78.1 77.8 77.6

Primary processing 82.3 86.1 80.5 81.3 81.4 81.5 81.7Advanced processing 81.0 81.8 76.0 76.4 76.8 76.3 75.9

Page 12: Fomc 19920818 g Bpt 219920813

II-7

MANUFACTURING SECTOR INDICATORS

MOTOR VEHICLE ASSEMBLIES(FRB Seasonals) Millions of units

1990 1991 1992

PRODUCTION WORKER HOURS (FRB seasonals)Manufacturing ex. Motor Vehicles & Parts

1990

Index, 1987 100

July

199219911991

REAL ADJUSTED DURABLE GOODS ORDERSIndex, 1987 - 100

-- - - Manufacturing IP excludingmotor vehicles and parts

Billions of dollars

Real adjusted orders*

/ June

V*

1990 1991 1992

'Adjusted durable goods orders equal bookings for durable goods industries that report unfilled orders, excluding orders for defense.nondefense aircraft, and motor vehicle parts. Nominal orders were deflated using a PPI for durable goods except transportationancninment and the BEA deflator for office comoutlna. and accountlna machinery.

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II-8

PERSONAL INCOME(Average monthly change at an annual rate; billions of dollars)

1992 1992

1991 Q1 Q2 Apr. May June

Total personal income 12.8 21.6 4.9 2.8 13.9 -1.9

Wages and salaries 5.2 11.3 1.3 -5.5 14.4 -4.9Private 3.8 8.6 -.2 -7.0 12.9 -6.6

Other labor income 1.5 1.4 1.4 1.4 1.5 1.4

Proprietors' income .1 7.1 -5.3 .7 -11.8 -4.7Farm -.3 1.7 -6.4 -1.3 -12.0 -5.8

Rent .6 -. 1 3.6 1.7 4.4 4.8Dividend -.8 .1 1.2 1.2 1.2 1.3Interest -. 6 -8.6 -1.8 -1.9 -1.8 -1.8

Transfer payments 7.8 12.2 5.2 5.5 7.2 2.9

Less: Personal contributionsfor social insurance 1.1 1.9 .7 .2 1.1 .9

Less: Personal tax and nontaxpayments -.1 -5.0 2.5 4.2 2.0 1.3

Equals: Disposable personal income 12.9 26.6 2.5 -1.4 12.0 -3.2

Memo: Real disposable income 1.2 9.8 -4.7 -9.2 3.6 -8.4

REAL PERSONAL CONSUMPTION EXPENDITURES(Percent change from the preceding period)

1992 1992

1991 Q1 Q2 Apr. May June

Personal consumptionexpenditures

Durable goodsExcluding motor vehicles

Nondurable goodsExcluding gasoline

ServicesExcluding energy

Memo:Personal saving rate

(percent)

.0

-2.5-1.0

-1.5-1.6

1.61.5

-Annual

5.1

16.515.2

5.55.6

2.23.0

rate-

-. 3

-2.7-2.2

-1.6-1.7

1.0.4

4.7 4.9 5.2

----Monthly rate----

-. 1 .2 .4

-. 6 1.1 2.1.2 -. 4 .9

.3 .1 .0

.7 -. 2 .4

-. 1 .0 .2-. 1 .1 .2

5.4 5.4 4.8

Page 14: Fomc 19920818 g Bpt 219920813

II-9

nondurables (other than energy) edged up. Among the major

categories of business equipment, the output of information

processing equipment continued to rise at a rapid rate; elsewhere,

production dropped back after having posted solid increases earlier

in the spring. Output of construction supplies posted a small gain

in July; this series, though fluctuating from month to month, has

been on an uptrend this year. The indexes for durable and

nondurable materials both edged up a bit last month.

The apparent lull in manufacturing output excluding motor

vehicles over June and July follows increases between January and

May that averaged 0.4 percent per month. Looking forward, the

staff's constructed measure of adjusted durable goods orders, which

rose sharply over the second quarter (chart), is consistent with

further small gains in this sector in the current quarter.

Personal Income and Consumption

Real disposable personal income edged up at a 0.7 percent

annual rate during the second quarter. Although income growth last

quarter was held down by a decline in farm subsidy payments, the

more fundamental factor was the lack of growth in wage and salary

income. The latest labor-market report suggests that private wages

and salaries were little changed in July, as both aggregate

production worker hours and average hourly earnings were flat last

month.

Real personal consumption expenditures edged down, on average,

in the second quarter, although spending showed some improvement

toward the end of the quarter. Real PCE was up 0.4 percent in June,

with broad-based gains led by higher sales of cars and light trucks.

With outlays weaker than income, the personal saving rate rose

0.3 percentage point in the second quarter to 5.2 percent. The

recent revision to the National Income Accounts indicates that the

Page 15: Fomc 19920818 g Bpt 219920813

II-10

Personal Consumption Expenditures Excluding Motor Vehicles

* Quarterly averages

Billions of 1987 dollars

June

-

II-10

1989 1990

Personal Consumption Expenditures for Motor Vehicles

* Quarterly averages

1992

Billions of 1987 dollars

June -

I I1989

Consumer Attitudes

1990 1991 1992

Index

Conference Board survey

1 1 ) glJ 1 -

,I- ir ,

KtffAAr 1/ws/^V^ tr AAA

Michigan survey

1984 1986 1988

3180

3140

3100

3060

3020

2980

250

230

210

190

170

150

140

120

100

80

60

401980 1982 1990 1992

Page 16: Fomc 19920818 g Bpt 219920813

II-11

saving rate has trended up over the past few years from the

3-1/2 percent reading in the third quarter of 1989--consistent with

the notion that household spending has become more conservative in

response to balance sheet problems.

In July, retail sales (excluding those at auto dealers and

building material and supply stores) rose 0.7 percent after edging

down in June 3 . Within this control grouping, sales rose

considerably in both months at apparel outlets and at furniture and

appliance stores. In addition, general merchandisers reported a

sharp rise in sales last month after little net change since April.

After deflation by components of the CPI, we estimate that real

spending in the PCE control category in July stood about 1/2 percent

above the second-quarter average.

Sales of autos and light trucks dropped back in July to

12.5 million units at an annual rate. However, the decline last

month was from an elevated June level, and the average selling pace

over the past two months remained well above that observed earlier

in the year. Accelerated deliveries of vehicles to daily rental

companies, which transferred about 200,000 units of sales from July

to June, more than accounted for last month's decline in domestic

auto sales. Although sales of North American-produced light trucks

dropped 500,000 units to a 3.9 million unit annual rate, that

decline followed an unusually brisk pace of sales in June. Sales of

foreign-produced light vehicles also moved down last month; the

weakness was especially pronounced for European luxury imports.

Consumer sentiment sagged again in July. The Conference

Board's index of consumer confidence registered a sharp decline, and

the less volatile Michigan index of consumer sentiment posted a more

3. The June change was previously reported as a 0.3 percentincrease. This downward revision, combined with an offsettingupward adjustment to May, suggests little change to BEA's advanceestimate of real consumer spending in the second quarter.

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II-12

RETAIL SALES

(Seasonally adjusted percentage change)

1991 1992 1992

Q4 Q1 Q2 Apr. May June

Total sales

Previous estimate

Retail control 1Previous estimate

Total excl. automotive group

Previous estimate

GAF 2Previous estimate

.0 2.7

2.7

-.7 2.2

2.2

-. 6 2.5

2.5

-1.7 5.5

5.5

.4 .3

.4

.2 .2

.3

.2 .2

.4

-.8 -. 3.0

Durable goods storesPrevious estimate

Bldg. material and supply

Automotive dealersFurniture and appliances

Other durable goods

Nondurable goods storesPrevious estimate

ApparelFood

General merchandise 3

Gasoline stations

Other nondurables 4

.9 3.83.8

-. 52.4

-1.7

-1.3

-.5 2.02.0

-2.6.3

-1.4-1.4

.0

4.0

.26.8

-. 9

1.6

1. Total retail sales less building material and supply stores and

automotive dealers, except auto and home supply stores

2. General merchandise, apparel, furniture, and appliance stores.

3. General merchandise excludes mail order nonstores; mail order

sales are also excluded in the GAF grouping.

4. Includes sales at eating and drinking places, drug and proprietary

stores.

-2.81.7

.4

.4

.1 .2.4

2.0

.2

-1.9

2.0

.0

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II-13

SALES OF AUTOMOBILES AND

(Millions of units at an annualLIGHT TRUCKS 1rate; BEA seasonals)

1991 1992 1992

1990 1991 Q4 Q1 Q2 May June July

Total 13.86 12.30 12.26 12.37 13.00 12.92 13.56 12.51

Autos 9.50 8.39 8.21 8.31 8.50 8.41 8.88 8.34

Light trucks 4.36 3.91 4.05 4.06 4.50 4.51 4.68 4.18

North American 2 10.84 9.73 9.82 9.86 10.57 10.53 11.11 10.35

Autos 6.90 6.14 6.06 6.07 6.32 6.26 6.66 6.41

Big Three 5.82 4.99 5.00 5.02 5.17 5.18 5.42 5.10Transplants 1.08 1.14 1.06 1.05 1.15 1.08 1.24 1.31

Light trucks 3.95 3.59 3.76 3.79 4.25 4.26 4.45 3.94

Foreign produced 3.01 2.57 2.45 2.50 2.43 2.39 2,45 2.16

Autos 2.60 2.25 2.15 2.24 2.18 2.15 2.22 1.93

Light trucks .41 .32 .29 .27 .24 .24 .23 .24

Memo:

Domestic nameplate

Market share, total .72 .70 .72 .72 .73 .73 .73 .72

Autos .64 .63 .64 .63 .63 .64 .63 .63

Note: Data on sales of trucks and

preliminary and subject to revision.

imported autos for the current month are

1. Components may not add to totals because of rounding.

2. Excludes some vehicles produced in Canada and Mexico that are classified

as imports by the industry.

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II-14

PRIVATE HOUSING(Millions of units; seasonally

ACTIVITYadjusted annual rates)

1991 1992S.. . Ql Q2

1992Apr. May June

All unitsPermitsStarts

.951.01

1.02 1.12 1.05 1.06 1.05 1.041.10 1.26 1.15 1.09 1.21 1.17

Single-family unitsPermits .75Starts .84

SalesNew homes .51Existing homes 3.22

.82 .92 .88 .87

.92 1.06 .99 .93.88 .88

1.04 1.01

.56 .62 .55 .54 .53 .573.23 3.41 3.44 3.49 3.46 3.36

Multifamily unitsPermitsStarts

.20 .19 .17 .19

.17 .20 .16 .15.18 .16.17 .16

p Preliminary. r Revised estimates.

PRIVATE HOUSING STARTS

(Seasonally adjusted annual rate)

Millions of units

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

1991Annual

II-14

Page 20: Fomc 19920818 g Bpt 219920813

II-15

moderate drop. Declines were widespread among the components of

both indexes. Despite the July declines, each index remained

considerably above its depressed level around the turn of the year.

Housing Markets

Housing demand appeared to firm again just before midyear.

According to revised estimates, sales of new single-family homes

leveled off in May, rather than declining, and preliminary data show

that sales rose 8 percent in June to 572,000 units at an annual

rate. The substantial June increase suggests that the payback from

the first-quarter bulge of sales had faded and that homebuyers were

responding to the declines in rates on fixed-rate mortgages that

occurred between March and June.

The further drop in mortgage interest rates last month could be

providing a boost to housing demand. The weekly index of mortgage

applications for home purchases compiled by the Mortgage Bankers

Association increased 40 percent during July after seasonal

adjustment. This index appears to have been closely correlated

with new home sales in the past (chart). However, the limited

history of the MBA series, and a number of conceptual and practical

shortcomings in its construction, suggest that considerable caution

should be exercised in interpreting the jump in July.5 Moreover,

as yet, the anecdotal reports on housing activity have not shown the

exuberance suggested by the MBA purchase index.

4. The purchase index is seasonally adjusted by the FRB staffusing the seasonal factors for new home sales; the two-year historyof the index is too short to permit the estimation of seasonalfactors. Before seasonal adjustment, the index rose 27 percent inJuly.

5. The MBA series is based on reports from a small and varyingnumber of mortgage bankers and thus has a weak statisticalfoundation. In addition, the index is subject to judgmentaladjustments that may partly account for the tight correlation withother housing indicators. Recent staff changes at MBA also raisequestions about the consistency of recent observations with thehistorical series. Finally, the index will be an inaccurate guideto changes in new home sales whenever there are shifts in thepropensity of borrowers to submit multiple mortgage applications.

Page 21: Fomc 19920818 g Bpt 219920813

II-16

Mortgage Bankers Association Purchase Index and New Home Sales(Seasonally adjusted)

Thousands of units700

\ 4------ *%~

\ t

I\I \

New home sales (left scale) /

I

-- 140

MBA index (right scale)

- 80

SI I I I I I I I 11111111111 I I I I 11111111199 199 1992 ~~ · · ~ ~· · _

600 I-

Index--I 160

500 I-

i I1991 19921990

Page 22: Fomc 19920818 g Bpt 219920813

II-17

On the production side, single-family starts edged down in June

to an annual rate of 1.01 million units, retracing about one-quarter

of the sizable increase in May; permit issuance, which is measured

with considerably less statistical error than starts, was little

changed in May and June. Multifamily housing starts dropped back to

a 157,000 unit pace in June, only slightly above the low for the

series. Multifamily construction continues to be impeded by a

persistent oversupply of rental apartments and the resulting

restraint on rents. The vacancy rate for multifamily rental

properties increased to 9.6 percent in the second quarter

(seasonally adjusted) from an already high 9.4 percent reading in

the first quarter.

Business Fixed Investment

Business fixed investment strengthened during the first half of

this year. After a moderate increase in the first quarter, real

equipment spending jumped more than 20 percent at an annual rate in

the second quarter, reflecting continued strength in outlays for

computing equipment, a substantial rebound in domestic aircraft

deliveries, and a pickup in business purchases of motor

vehicles. In addition, outlays for industrial equipment

increased modestly last quarter, the first rise in more than three

years.

In the current quarter, equipment spending appears well

positioned to post another increase. The 5.2 percent jump in

shipments of nondefense capital goods (excluding aircraft) in June

provides an elevated starting point for third-quarter outlays. In

addition, new orders for these goods rose strongly between April and

June. Anecdotal reports indicate that the price wars among domestic

6. Revised estimates for shipments of nondefense capital goodsduring May and June suggest an upward revision of about$1-3/4 billion to BEA's advance estimate of second-quarter PDEspending.

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II-18

BUSINESS CAPITAL SPENDING INDICATORS(Percent change from preceding comparable period;

based on seasonally adjusted data)

1991 1992 1992

Q4 Q1 Q2 Apr. May June

Producers' durable equipment

Shipments of nondefense capital goods .9 .5 1.5 -3.3 -.9 7.7Excluding aircraft and parts 1.2 .2 2.7 -1.8 .4 5.2Office and computing 6.8 5.0 3.9 1.8 .3 4.7All other categories -.3 -1.2 2.4 -2.9 .5 5.4

Shipments of complete aircraft 1 -23.2 65.0 n.a. -13.8 -3.9 n.a.

Sales of heavy weight trucks -1.8 6.6 5.6 7.1 -7.8 2.5

Orders of nondefense capital goods -4.0 2.5 -.2 -7.0 1.9 2.3Excluding aircraft and parts -1.3 4.0 .6 -2.9 1.6 5.3

Office and computing .4 9.2 4.6 -1.2 4.9 3.0All other categories -1.8 2.6 -.5 -3.4 .7 6.0

Nonresidential structures

Construction put-in-place -4.2 .6 -.7 -1.5 -1.8 -1.2Office -10.8 -4.9 -8.7 -3.4 -5.9 -2.5Other commercial -10.4 1.5 .1 -3.1 -.2 2.1Industrial 2.7 2.4 -6.3 -10.2 -1.3 -4.3Public utilities .8 5.2 1.3 3.8 -2.5 -2.9All other -4.2 -2.7 6.2 2.2 .1 1.1

Rotary drilling rigs in use -9.2 -4.7 -1.5 1.3 -.1 -7.4

Footage drilled 2 -1.3 -15.1 n.a. -5.7 .3 n.a.

Memo:Business fixed investment3 -5.2 3.0 13.5 n.a. n.a. n.a.

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."Monthly data are seasonally adjusted using FRB seasonal factors constrained toBEA quarterly seasonal factors. Quarterly data are seasonally adjusted usingBEA seasonal factors.

2. From Department of Energy. Not seasonally adjusted.3. Based on constant-dollar data; percent change, annual rate.n.a. Not available.

Page 24: Fomc 19920818 g Bpt 219920813

II-19

producers of computing equipment, as well as rapid product

innovation, are continuing to spur demand for a variety of

products--especially personal computers and workstations. More

generally, real corporate cash flow has continued to rise, providing

greater wherewithal for investment outlays. On the downside,

domestic outlays for aircraft jumped in the second quarter to what

appears to be an unsustainably high level and probably will retreat

somewhat in the current quarter. The longer-term outlook for

domestic purchases of aircraft is decidedly negative, as new orders

placed with Boeing by domestic airlines have weakened further this

year (chart).

Outlays for nonresidential structures were about flat during

the first half of this year after declining sharply in 1991. Among

the components of construction, spending for commercial buildings

other than offices has firmed in recent quarters, and outlays for

public utility structures have continued to trend up. However,

construction activity in the office sector is still declining, and

recent weakness in industrial construction has offset the gains

recorded in late 1991 and early this year.

Looking ahead, new contracts for total nonresidential

construction have changed little on net for some time now (chart),

suggesting that the bulk of the contraction in spending is behind

us. Leading indicators for industrial building have actually turned

up in recent months, while those for office buildings and other

commercial structures have continued to edge down. Coldwell-Banker

estimates that the office vacancy rate for the United States as a

whole remained around 19-1/2 percent as of June 30, suggesting that

little progress has been made in absorbing the huge overhang of

vacant space. Even in the healthier industrial sector, the

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II-20

RECENT DATA ON ORDERS AND SHIPMENTS

Office and Computing EquipmentBillions of dollars

-Orders- - - -Shipments

I June/I

1987 1988 1989 1990 1991 1992

Other Equipment (excluding aircraft and computers) Billions of dollarsBillions of dollars

- Orders- - - - Shipments

1989 19901987 1988 1992

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II-21

Real PDE Aircraft Outlays

Billions of 1987 dollarsTotal Boeing Domestic Orders(Four-Quarter Moving Average) Index = 100 in 1987

1988 1990 1992I I I I I

1988 1990

Real Equipment Investment and Cash Flow(Four-Quarter Percent Change)

Percent

Real Domestic Corporate Cash Flow- - - - Producers' Durable Equipment

-l o

I X I

1992

1965 1970 1975 1980 1985 1990

1. Excluding dividends. With inventory valuation adjustment.

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II-22

NONRESIDENTIAL CONSTRUCTION AND SELECTED INDICATORS*(Index, Dec. 1982 = 100, ratio scale)

Total Building

Construction (C)Permits (P), Contracts (CN), orNew commitments (NC)

1980 1982 1984 1986 1988 1990 1992

Office Other Commercial

1984 1986 1988 1990 1992 1984 1986 1988 1990 1992

Industrial- 240

(NC) - 180

--' 120

(C)60

1984 1986 1988 1990 1992

*Six-month moving average for all series shown. For contracts, total onlyNew commitments are the sum of permits and contracts.

Institutional

1984 1986 1988 1990 1992

includes private, while individual sectors include private and public.

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II-23

relatively low rates of capacity utilization limit the need for new

facilities.

Business Inventories

BEA's advance GDP estimate indicated that nonfarm business

inventories changed little during the second quarter while final

sales of domestic businesses posted a small gain. In constant-

dollar terms, the ratio of inventories to final sales for the

nonfarm sector was estimated to have edged down to 2.57 months at

the end of the second quarter, a relatively low ratio by historical

standards.

Manufacturers' inventories, measured in current-cost terms,

posted a small decline over the second quarter. Stocks of aircraft

and parts continued to be pared, likely a planned adjustment to

declining orders for civilian aircraft over the past year and the

reductions in defense spending. Outside of the aircraft industry,

factory stocks rose moderately from April to June, retracing the

decline of the first quarter. The inventory-shipments ratio for

manufacturing has been moving down since the end of 1991; the ratio

in June was the lowest since July 1979 (chart).

In wholesale trade, inventories expanded sharply in June, with

runups reported for a wide range of goods. However, because sales

also surged, the wholesalers' inventory-sales ratio edged down in

June. On balance, the ratio has not changed much over the past

several months, remaining near the high end of the range that has

prevailed in recent years.

For retail trade, the data through May indicated that stores

were able to reverse some of the unintended stockbuilding that had

7. After the advance estimate was released, incoming data fromCensus surveys showed that manufacturing and merchant wholesaleinventories taken together expanded more rapidly during the secondquarter than BEA had assumed. The implied upward revision to thesecond-quarter inventory change is $4-1/4 billion (annual rate) incurrent-cost terms, or roughly $3-1/2 billion in constant dollars.

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II-24

CHANGES IN MANUFACTURING AND TRADE INVENTORIES

(Billions of dollars at annual rates;based on seasonally adjusted data)

1991 1992 1992

Q4 Q1 Q2 Apr. May June

Current-cost basis

Total 23.1 -7.9 n.a. 29.1 -7.3 n.a.Excluding auto dealers 22.1 -13.7 n.a. 6.2 -5.5 n.a.Manufacturing -14.0 -11.2 -1.4 -12.4 13.0 -4.9

Excluding aircraft -7.0 -7.1 8.2 .2 16.3 8.2Wholesale 19.9 -1.2 9.5 -2.9 -12.4 43.9Retail 17.3 4.5 n.a. 44.4 -7.9 n.a.

Automotive 1.1 5.8 n.a. 22.9 -1.8 n.a.Excluding auto dealers 16.2 -1.3 n.a. 21.6 -6.1 n.a.

Constant-dollar basis

Total 16.2 -13.2 n.a. 10.8 -1.6 n.a.Excluding auto dealers 17.0 -18.0 n.a. -5.3 -5.0 n.a.Manufacturing -11.3 -8.7 n.a. -16.7 4.5 n.a.Wholesale 15.2 -4.9 n.a. -4.0 -1.0 n.a.Retail 12.3 .5 n.a. 31.6 -5.1 n.a.Automotive -.9 4.8 n.a. 16.1 3.3 n.a.Excluding auto dealers 13.1 -4.4 n.a. 15.5 -8.4 n.a.

INVENTORIES RELATIVE TO SALES 1

(Months supply; based on seasonally adjusted data)

1991 1992 1992

Q4 Q1 Q2 Apr. May June

Current-cost basis

Total 1.54 1.52 n.a. 1.51 1.52 n.a.Excluding auto dealers 1.52 1.50 n.a. 1.49 1.49 n.a.Manufacturing 1.62 1.62 1.57 1.58 1.59 1.55

Excluding aircraft 1.45 1.45 1.41 1.42 1.42 1.39Wholesale 1.37 1.36 1.37 1.35 1.36 1.35Retail 1.58 1.54 n.a. 1.57 1.56 n.a.

Automotive 1.87 1.85 n.a. 1.92 1.89 n-a.Excluding auto dealers 1.50 1.46 n.a. 1.47 1.46 n.a.

1. Ratio of end of period inventories to average monthly sales for the period.

Page 30: Fomc 19920818 g Bpt 219920813

II-25

RATIO OF INVENTORIES TO SALES(Current-cost data)

Ratio2.1

Manufacturing

# 1 • 1 1.9Total - 1.7

10 ' ," " ' ' June - 15

SI- 1.5

June

1.3

1,2

1 - 1 - t - 1 - 1 - -- -I - 1.1

1980 1982 1984 1986 1988 1990 1992

Ratio Ratio2.7 1.7

Retail

:'\, ,': ," G.A.F.2.5 1 f , -1.li" I ,1 -.' " . *'

2.3 - 1.5

2.1 - Excluding auto - 1.4

1980 1982 1984 1986 1988 1990 1992

Page 31: Fomc 19920818 g Bpt 219920813

II-26

FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS(Unified basis, billions of dollars, except where otherwise noted)

Fiscal year to date

OutlaysDeposit insurance (DI)Defense Cooperation

account (DCA)

Outlays excluding DI and DCANational defenseNet interestSocial securityMedicare and healthIncome securityOther

ReceiptsPersonal income taxesSocial insurance taxesCorporate income taxesOther

June June1991 1992

106.0 117.16.0 1.4

-.8 .0

100.722.715.725.914.99.8

11.6

103.444.534.816.57.6

115.725.915.427.218.813.614.8

120.953.138.420.88.7

Dollar PercentFY1991 FY1992 change change

968.0 1043.330.3 9.3

-38.9

976.6237.6144.8201.2128.2129.3135.5

789.9346.7300.176.466.7

-5.2

1039.2225.9150.3215 .1153.4151.0143.5

815.6348.3315.578.073.7

75.3 7.8-21.0 -69.2

33.7 -86.7

62.6-11.7

5.513.925.121.78.0

25.71.6

15.41.67.1

6.4-4.93.86.9

19.616.85.9

3.3.5

5.12.1

10.6

Deficit(+)Excluding DI and DCA

2.6 -3.8 178.1 227.7-2.7 -5.2 186.7 223.6

49.6 27.936.9 19.7

Details may not add to totals because of rounding.

Page 32: Fomc 19920818 g Bpt 219920813

II-27

occurred in the preceding two months; inventory-sales ratios in May

did not appear especially high by historical standards. An update

on retail inventories will be included in the Supplement.

Federal Sector

On an NIPA basis, real federal purchases were about flat in the

second quarter; a small decline in outlays for national defense was

offset by increases in nondefense purchases. The revised data,

which incorporate updated budget estimates from OMB, indicate that

the rise in nondefense outlays since the end of 1990--at about a

6 percent annual rate--has been somewhat more rapid than previously

thought. Even so, the new data show that total real federal

purchases fell about 4-1/2 percent over the year ended in the second

quarter, reflecting the marked downtrend in defense outlays.

The unified federal budget deficit over the first nine months

of FY1992 totaled $228 billion, up $50 billion from the comparable

period a year earlier. The data for the most recent months do not

alter the trends that have been evident over the course of FY1992--

anemic growth in receipts and rapidly rising outlays for entitlement

programs.

So far this fiscal year, receipts have increased only 3 percent

from the level recorded during the first nine months of FY1991.

Social Security taxes account for the bulk of the increase.

Personal tax payments through June were little changed from the same

period a year earlier because of the slow pace of recovery and lower

withholding rates. Corporate income tax receipts have moved up in

recent months, likely owing to the rebound in profits, but the year-

to-date increase has been only 2 percent.

Among the components of outlays, spending on health programs

has increased nearly 20 percent during FY1992, and spending for

unemployment insurance and other income-security programs has risen

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II-28

ADMINISTRATION POLICY BUDGET PROJECTIONS(Billions of dollars)

Fiscal years1992 1993 1994 1995 1996 1997

Outlays 1407 1504 1527 1545 1620 1701

Receipts 1074 1163 1253 1326 1402 1464

DeficitMid-Session projection 334 341 274 218 218 237

(February projection) 400 350 212 194 181 188

Deficit ex deposit insuranceand Desert Stormcontributions

Mid-Session projection 328 282 253 248 241 271(February projection) 325 284 237 221 203 220

Memo:Deposit insurance 11 59 21 -30 -23 -34Desert Storm

contributions(-) -5 0 0 0 0 0

ADMINISTRATION ECONOMIC ASSUMPTIONS

Calendar years1992 1993 1994 1995 1996 1997

------ Percent change, Q4 to Q4-------

Real GDP 2.7 3.0 3.0 3.0 2.9 2.8

GDP deflator 3.0 3.2 3.1 3.1 3.1 3.0

CPI-U 3.1 3.3 3.2 3.2 3.2 3.1

Percent, annual average--------

Civilian unemployment rate 9.1 8.4 8.0 7.6 7.1 7.2

Interest ratesTreasury bills 3.9 4.7 5.3 5.3 5.2 5.1Treasury notes 7.3 6.9 6.7 6.6 6.6 6.6

Source: OMB, Mid-Session Review: The President's Budget and EconomicGrowth Agenda, July 1992.

Page 34: Fomc 19920818 g Bpt 219920813

II-29

almost as fast. In contrast, spending on deposit insurance has

fallen sharply because funding for the RTC lapsed at the end of

March, and outlays for national defense (excluding foreign

contributions for Operation Desert Storm) have dropped almost

5 percent thus far in FY1992.

The Administration's Mid-Session Review of the budget revised

down the deficit estimate for FY1992 to $334 billion, compared with

the $400 billion projection in February. Outlays for deposit

insurance are now estimated to be lower not only because of the

shortfall in RTC funding, but also because of the somewhat firmer

condition of the depository sector. The deficit estimate for FY1993

was adjusted down slightly to $341 billion, while the estimates for

FY1994 and beyond were increased because of deferred RTC spending,

downward adjustments to tax receipts, and higher estimates of

benefit payments for Medicare, Social Security, and other transfer

programs. Revisions to the economic projections underlying the

budget projections were minor.

The CBO released its August update of the budget outlook, which

contained revisions that were largely similar to the

Administration's. CBO now projects a FY1992 deficit of $314

billion, $20 billion below the Administration's estimate; the

difference reflects the latter's assumption of a tax cut in FY1992

and technical differences in revenues and health-related spending.

On a current services basis, the two sets of deficit estimates for

FY1993 through FY1997 are very close; the Administration's deficit

estimates shown in the table are lower because they assume enactment

of deficit reduction measures while CBO's estimates do not.

In legislative activity, the Senate began debate on a wide-

ranging tax bill that would establish tax-favored enterprise zones;

repeal the luxury tax on boats, planes, jewelry, and furs; index the

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II-30CBO BUDGET ESTIMATES(Billions of dollars)

Fiscal years10OA 10995 1996 1097

1402 1493

1088 1162

314

Deficit ex deposit insuranceand Desert Stormcontributions 306

1511 1567 1644 1745

1242 1323 1390 1455

268

282

244

239

254 290

307

Memo:Deposit insuranceDesert Storm

contributions(-)

-7 -16

CBO ECONOMIC ASSUMPTIONS

Calendar years1992 1993 1994 1995 1996 1997

------- Percent change, year over year---

Real GDP 1.9 3.1 2.8 2.6 2.4 2.2

GDP deflator 2.5 3.0 3.0 3.0 3.0 3.0

CPI-U 3.2 3.4 3.4 3.4 3.4 3.4

---------- Percent, annual average---------

Civilian unemployment rate 7.5 6.8 6.1 5.9 5.7 5.6

Interest ratesTreasury bills 3.6 3.7 4.8 5.4 5.5 5.6Treasury notes 7.1 6.9 6.9 7.0 7.1 7.1

Source: CBO, Economic and Budget Outlook: An Update, August,1992.

1. The projections assume that revenues and outlays for major benefitprograms evolve according to laws in effect at the time the projections aremade, and that appropriations for other programs are consistent with thediscretionary spending caps. The projections include Social Security andthe Postal Service, which are off-budget.

Outlays

Receipts

Deficit

1909 1 09q _L__ ____ _1_1

Page 36: Fomc 19920818 g Bpt 219920813

II-31

price level above which the luxury tax is assessed on cars; and

extend a number of expiring tax breaks. The bill also includes

several provisions similar to the "economic-growth measures"

proposed by the Administration earlier this year. Among these items

are a $2,500 credit for first-time homebuyers, the restoration of

passive-loss deductions for real estate, and a liberalization of IRA

accounts; the bill does not include a cut in the capital gains tax

rate. As required by the budget rules, the bill is revenue neutral

over a five-year horizon, although it likely would result in sizable

revenue losses in later years. Work on this bill will resume after

the Senate returns from recess September 8. If passed by the full

Senate, the bill would have to be reconciled with the narrower tax

bill approved by the House in early July. 8

State and Local Government Sector

Real purchases of goods and services by state and local

governments likely declined in the second quarter after a sharp

9increase in the first quarter. On balance, purchases by these

governments have risen at only a 1-1/4 percent annual rate since the

end of 1990, a sharp slowing from the 3-3/4 percent pace averaged

between 1985 and 1990. The efforts of state and local governments

to hold the line on spending also can be seen in the marked

reduction in the growth of their payrolls since 1990 (chart).

Despite these actions, the revised NIPA data suggest that these

jurisdictions have made very little progress in reducing their

fiscal imbalances. Entitlement expenditures have continued to soar,

and tax receipts have been damped by the subdued pace of economic

8. The House bill lacks the various "economic-growth measures"included in the Senate bill; otherwise, the two bills are broadlysimilar.

9. Although BEA's advance estimate showed real state and localpurchases about unchanged in the second quarter, subsequent data onconstruction put-in-place suggest a downward revision of about$1-3/4 billion to spending.

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II-32

STATE AND LOCAL SECTOR

EMPLOYMENTFour-quarter percent change

02 _-1

1987 1988 1989 1990 1991 1992

SURPLUS/DEFICIT* IN OPERATING AND CAPITAL ACCOUNTSBillions of dollars

Revised- - - - Previous

1972 1977 1982 1987 1992

"NIPA basis. Excludes social Insurance funds.

Page 38: Fomc 19920818 g Bpt 219920813

II-33

activity. Instead of falling roughly $20 billion over the past five

quarters, the deficit of operating and capital accounts, excluding

social insurance funds, is now estimated to have shrunk only

slightly since early 1991 (chart). The upward revision to the

deficit during the first half of this year largely reflects

substantially higher payments for Medicaid and a lower estimate of

interest income from the sector's holdings of securities.

Although fiscal difficulties continue to plague many states.

legislatures have not taken particularly aggressive steps of late in

trying to redress the structural imbalances that remain. Because it

is an election year, many governments have tried to avoid sizable

tax hikes and spending cuts. However, in California, this approach

has led to fiscal chaos. The state still did not have a budget in

place by mid-August, one and a half months into the fiscal year.

The current budget gap in California is estimated at nearly

$11 billion. Officials are reluctant to raise taxes after enacting

more than $6 billion in tax hikes last year, and legislators

continue to reject the significant reductions in spending on primary

and secondary education proposed by the governor.

Labor Costs

Continued slack in labor markets and moderating price inflation

have led to further slowing of compensation costs. The Employment

Cost Index (ECI) for hourly compensation for private industry

workers increased just 2.5 percent at a seasonally adjusted annual

rate over the March to June period--substantially less than in

previous quarters. Over the twelve months ended in June, hourly

compensation increased 3.7 percent, 0.7 percentage point less than

over the preceding twelve months; both the wage and salary component

and the benefits component of the ECI decelerated notably over this

period. However, the deceleration in benefits partly reflected a

Page 39: Fomc 19920818 g Bpt 219920813

II-34

EMPLOYMENT COST INDEX(Percent change from preceding period at compound annual rates;

based on seasonally adjusted data) 1

1991 1992

Mar. June Sep. Dec. Mar. June

Total compensation costs:

Private industry workers 4.9 4.5 4.1 4.0 4.0 2.5

By industry:Goods-producing 4.6 4.9 4.1 4.4 5.1 2.5Service-producing 4.9 4.5 4.1 4.0 3.3 2.1

By occupation:White-collar 6.1 4.9 4.0 2.9 4.3 2.9Blue-collar 4.6 4.1 4.9 3.7 4.4 3.2Service workers 3.8 6.1 6.3 3.3 4.3 2.5

By bargaining status:Union 5.0 4.9 4.9 3.7 7.4 3.2Nonunion 5.7 4.9 4.1 2.5 4.4 2.5

Memo:Wages and salaries 4.2 4.2 3.0 3.3 3.3 1.8Benefits 5.6 6.6 6.9 5.7 6.0 3.4

1. Changes are from final month of preceding period to final month ofperiod indicated. Percent changes are seasonally adjusted by the BLS.Data by bargaining status are not seasonally adjusted.

EMPLOYMENT COST INDEX(Private industry workers; twelve-month percent changes)

1991 1992

1990 1991 June Sep. Dec. Mar. June

Total compensation costs:

Private industry workers 4.6 4.4 4.4 4.5 4.4 4.2 3.7

By industry:Goods-producing 4.8 4.6 4.4 4.5 4.6 4.6 4.1Service-producing 4.6 4.3 4.4 4.5 4.3 4.0 3.5

By occupation:White-collar 4.9 4.5 4.5 4.4 4.5 4.0 3.5Blue-collar 4.4 4.3 4.1 4.4 4.3 4.3 4.0Service workers 4.7 4.8 4.8 5.5 4.8 4.8 3.9

By bargaining status:Union 4.3 4.6 4.5 4.8 4.6 5.2 4.8Nonunion 4.8 4.3 4.4 4.3 4.3 4.0 3.4

Memo:Wages and salaries 4.0 3.7 3.7 3.7 3.7 3.4 3.0Benefits 6.6 6.2 6.2 6.4 6.2 6.3 5.5

Page 40: Fomc 19920818 g Bpt 219920813

11-35

decline in contributions to employee pension funds between March and

June, a pattern that is unlikely to be repeated in coming quarters.

By industry, the service-producing sector accounted for

virtually all the slowdown of hourly compensation over the twelve

months ended in June (chart). The deceleration in this sector,

though widespread, was especially marked in retail trade, business

services, finance, and real estate. These industries employ

relatively large numbers of workers in white-collar and sales

occupations, which explains, in part, why increases in compensation

costs for these workers have slowed more than have the increases for

blue-collar workers. Another factor is the persistence of rapid

increases in benefits costs for workers in the goods-producing

industries, which contrasts with the slowing in the service sector.

Compensation costs in the state and local sector picked up to a

5-3/4 percent pace in the second quarter. In large part, the upturn

stemmed from the restoration of contributions to employee pension

funds by several jurisdictions that had lowered or suspended

contributions last year. Despite this rebound, hourly compensation

in the state and local sector increased only 3-1/4 percent over the

year ended in June, nearly 2 percentage points less than the

increase in the preceding year.

By bargaining status, union compensation gains in the ECI

outpaced nonunion gains by nearly 1-1/2 percentage points over the

twelve months ended in June, reversing the trend that had prevailed

for nearly a decade. Indeed, compensation increases for unionized

workers have actually picked up over the past year, as benefits

costs have accelerated and wage increases have edged down only

slightly (chart).

Separate data on new major collective bargaining agreements

also indicate little deceleration in unionized sector wages. The

Page 41: Fomc 19920818 g Bpt 219920813

II-36

Employment Cost Index

Private Industry Workers

Compensation-- - - Wages and Salaries------ Benefits

\---,

Twelve-month percent change-n 9

--4 .4 - - ----- \

IIII i i i

1987 1988 1990

Private Industry Workers

1991

I I

1992

Twelve-month percent change-- 1 9

Goods-Producing Sector- Service-Producing Sector

,- - - - - --

~- - ,.-

I I I I I I I I I L _J i1987 1988 1989 1990 1991 1992

Twelve-month percent change-- 9

Private Industry- - - - State and Local Government

-4 7

1,- N --- . 1

1N......................... ...... .

3:

I I I I I I I I I I

7

3

· ·1I I1

--

5:

1987 1988 1989 1990 1992

Page 42: Fomc 19920818 g Bpt 219920813

II-37

Compensation in Union Contracts

Unionized WorkersTwelve-month percent change

------ ECI Compensation- - - - ECI Wages and Salaries

r- ilLi1. ilI I i

1987 1988 1989 1990 1991 1992

CHANGES IN NEGOTIATED WAGE AND COMPENSATION RATESUNDER MAJOR COLLECTIVE BARGAINING SETTLEMENTS

(Percent change)

1992

Q2 partiesunder prior

1990 1991 Q1 Q2 settlements

Wage rate changes (all industries) 2

First-year adjustments 4.0 3.6 2.9 2.9 3.0Average over life of contract 3.2 3.2 3.0 3.0 3.2Workers affected (in thousands) 2,004 1,744 127 448 ---

Compensation rate changes (all industries) 3

First-year adjustments 4.6 4.1 2.5 3.8 ---Average over life of contract 3.2 3.4 3.5 3.5 ---Workers affected (in thousands) 1,278 1,155 51 184 ---

1. Estimates exclude lump-sum payments and potential gains under cost-of-living clauses.

2. Contracts covering 1,000 or more workers.3. Contracts covering 5,000 or more workers.

EFFECTIVE WAGE CHANGE IN MAJOR UNION CONTRACTS AND COMPONENTS OF CHANGE

1987 1988 1989 1990 1991 1992:Q2 1

Total effective wage change 3.1 2.6 3.2 3.5 3.6 3.3

Contribution of:New settlements .7 .7 1.2 1.3 1.1 .9Prior settlements 1.8 1.3 1.3 1.5 1.9 2.0COLAs .5 .6 .7 .7 .5 .4

1. Changes over the four quarters ended this period.

Page 43: Fomc 19920818 g Bpt 219920813

II-38

RECENT CHANGES IN CONSUMER PRICES

(Percent change; based on seasonally adjusted data)1

Relative 1991 1992 1992importance ---

Dec. 1991 1990 1991 Q4 Q1 Q2 June July

--- Annual rate------ -Monthly rate-

All items 2 100.0 6.1 3.1 3.2 3.5 2.6 .3 .1Food 16.0 5.3 1.9 2.7 1.5 -1.2 .1 -. 1Energy 7.4 18.1 -7.4 3.6 -6.9 12.5 2.0 .3All items less food

and energy 76.6 5.2 4.4 3.1 4.8 2.8 .2 .2Commodities 24.8 3.4 4.0 .6 5.3 2.1 .0 .2Services 51.9 6.0 4.6 4.3 4.8 2.9 .3 .3

Memorandum:

CPI-W3 100.0 6.1 2.8 3.3 3.0 2.7 .3 .2

1. Changes are from final month2. Official index for all urban3. Index for urban wage earners

of preceding period to final month of period indicated.consumers.and clerical workers.

RECENT CHANGES IN PRODUCER PRICES(Percent change; based on seasonally adjusted data) 1

Relative 1991 1992 1992importanceDec. 1991 1990 1991 Q4 Q1 Q2 June July

----- Annual rate------ -Monthly rate-

Finished goods 100.0 5.7 -.1 1.0 1.0 3.0 .2 .1Consumer foods 21.9 2.6 -1.5 -1.0 .3 -1.6 .2 .0Consumer energy 13.8 30.7 -9.6 -.5 -7.0 16.1 2.3 -.4Other finished goods 64.2 3.5 3.1 2.1 3.7 1.8 -.1 .2

Consumer goods 39.5 3.7 3.4 2.4 3.6 2.4 -.3 .2Capital equipment 24.7 3.4 2.5 1.9 3.5 .9 -.1 .2

Intermediate materials 2 95.3 4.6 -2.7 -1.7 .0 5.0 .7 .1

Excluding food and energy 81.7 1.9 -.8 .0 1.7 1.3 .2 .2

Crude food materials 41.2 -4.2 -5.8 -4.9 11.8 1.5 .8 -1.7

Crude energy 40.0 19.1 -16.6 5.3 -26.6 44.8 2.3 1.1

Other crude materials 18.7 .6 -7.6 -5.9 15.0 3.5 .2 1.3

1. Changes are from final month of preceding2. Excludes materials for food manufacturing

period to final month of period indicated.and animal feeds.

Page 44: Fomc 19920818 g Bpt 219920813

II-39

series on effective wage change in agreements covering 1,000 or more

workers rose 3.3 percent for the year ended in June, only

1/4 percentage point less than the increases recorded in 1990 and

1991. This measure of wage change--which includes the effects of

first-year adjustments from new settlements and the deferred

adjustments and COLAs under prior settlements--is conceptually

similar to the ECI for wages and salaries. Although first-year

adjustments in new settlements have moderated, sizable deferred

adjustments under earlier contracts have kept the effective wage

change from decelerating much.

Looking ahead, the average wage increase over the life of new

settlements signed so far this year was 3 percent, roughly the same

as the first-year adjustment. In addition, the average increase for

total compensation over the life of new settlements--available only

for those agreements covering 5,000 or more workers--was 3.5 percent

for the settlements signed during the first half of this year.

Average hourly earnings for production or nonsupervisory

workers were unchanged in July, after an increase of only

0.2 percent in June. Over the twelve months ended in July, average

hourly earnings were up 2.2 percent, about 3/4 percentage point

below the increase in the previous twelve-month period.

Prices

Recent monthly readings point to a further slowing in price

inflation, reflecting moderation in labor cost increases, continued

slack in industrial capacity, and limited upward pressure from

materials costs. Consumer prices rose only 0.1 percent in July,

after a 0.3 percent increase in June that was boosted by a short-

lived bulge in energy prices. Food prices continued to restrain

overall consumer price inflation, and prices of other goods and

services advanced only 0.2 percent in both June and July. At the

Page 45: Fomc 19920818 g Bpt 219920813

II-40Daily Spot and Posted Prices of West Texas Intermediate

Dollars per barrel

Spot

,· 1I',N ir

A81 I

fA·P

Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug

1. Posted prices are evaluated as the mean of the range listed In the Wal Street Journal.

MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE

Year and Month Posted Spot

1991September 20.55 21.86October 21.96 23.23November 21.40 22.47December 18.47 19.521992January 17.63 18.82February 17.72 19.00March 17.81 18.92April 19.20 20.24May 19.90 20.94June 21.46 22.38July 20.77 21.76August 1 20.38 21.23

1.. Price through August 12.

Page 46: Fomc 19920818 g Bpt 219920813

II-41

producer level, the PPI for finished goods increased 0.2 percent in

June and 0.1 percent in July; excluding food and energy, this

measure has risen 2-1/2 percent over the past year, markedly under

its pace in the preceding few years.

The CPI for energy rose 2 percent in June and moved up a bit

further in July, as previous increases in crude oil costs reached

the retail level. However, prices of crude oil have eased, on

balance, since June, and refinery prices of petroleum products

declined in July. Private survey data suggest that retail gasoline

prices turned down in early August.

Consumer food prices were flat on balance over June and July,

and the PPI for finished foods increased only slightly over this

period. Increases in output have led to declines in the retail

prices of meats and those of fruits and vegetables in recent months,

and the average price increases for other food categories have

continued to be small. In total, the CPI for food was up only

1/2 percent over the year ended in July.

Outside of food and energy, prices of consumer goods were flat

in June and then rose 0.2 percent in July. Prices of apparel fell

in both months, owing to early markdowns on summer merchandise.

while tobacco prices partially retraced their large increase in May.

Price increases for new cars and light trucks moderated a bit, but

used car prices rose sharply for the fourth straight month. Prices

of nonenergy services rose 0.3 percent in both June and July, held

down by a relatively small increase in rents over the two months.

Airfares declined sharply in June, and then reversed about half of

this decline in July. 1 0

10. More recently, major airlines have announced substantial newdiscounts, pointing to renewed downward pressures on airfares thismonth.

Page 47: Fomc 19920818 g Bpt 219920813

II-42

INFLATION RATES EXCLUDING FOOD AND ENERGY

Percent change from twelve monthsearlier

July July July1990 1991 1992

CPI 5.0 4.8 3.7

Services 5.9 5.1 4.0

Owners' equivalent rent 6.0 3.3 3.5Tenants' rent 4.3 3.6 2.3Other renters' costs 7.2 12.1 6.1Auto finance charges -1.9 -1.8 -10.6Airline fares 11.4 3.3 -.9Medical care 9.4 8.6 7.7Entertainment 5.3 5.4 3.0

Goods 3.5 4.2 3.0excluding used cars 3.8 4.4 2.9

Alcoholic beverages 4.8 10.4 3.0New vehicles 1.4 4.5 2.4Apparel 4.9 3.5 3.2Housefurnishings 1.2 1.1 1.3Housekeeping supplies 3.5 2.4 .9Entertainment 3.8 3.4 2.3

PPI Finished goods 3.8 3.4 2.5

Consumer goods 3.9 3.6 2.9

Capital equipment, excludingmotor vehicles and computers 3.5 3.8 2.5

PPI intermediate materials .3 .4 .8

PPI crude materials 2.0 -8.9 3.4

Factors Affecting Price Inflation

ECI hourly compensation 5.2 4.4 3.7Goods-producing 5.2 4.4 4.1Service-producing 5.2 4.4 3.5

Civilian unemployment rate 2 5.4 6.8 7.7

Capacity utilization 2 83.1 78.7 77.6 3(manufacturing) 4

Inflation expectations 4.7 3.8 3.9

Non-oil import prices 5 .5 1.9 1.2Consumer goods, excluding autos,

food, and beverages 3.3 .9 3.0Autos -.8 5.6 2.0

1. Private industry workers, periods ended in June.2. End-of-period value.3. June level.4. University of Michigan Survey, twelve-month horizon.5. BLS import price index (not seasonally adjusted), periods ended

in June.

Page 48: Fomc 19920818 g Bpt 219920813

II-43

The underlying trend of inflation--as measured by the twelve-

month change in the CPI excluding food and energy--has moved down to

about 3-3/4 percent, a marked slowing from the 5 percent range

observed for the years ended in July 1990 and 1991 (table). This

slowing has been most apparent in the prices of nonenergy services,

which rose 4 percent over the latest twelve-month period, compared

with increases of about 6 percent and 5 percent, respectively,

during the years ended in July 1990 and July 1991. Moderation in

rent increases, reflecting weakness in housing markets, contributed

importantly to this deceleration. Declines in auto finance charges

and airfares also have held down the pace of services inflation this

year. In addition, prices have been rising less rapidly in some

service categories for which labor costs are important, in

particular, entertainment and medical care. The slowing in hourly

compensation gains in service-producing industries, discussed above.

likely has paved the way for some of the recent deceleration in

inflation of prices for services.

Inflation in goods prices at retail also has slowed, although

the timing and composition have been more uneven. For items other

than used cars, the CPI for goods (nonfood, nonenergy) has risen

about 3 percent over the past year, in line with the increases shown

in domestic producer prices and in import prices for these

goods.11 This CPI component had risen 4-1/2 percent during the

year ended in July 1991, boosted in part by higher federal excise

taxes (mainly on alcoholic beverages); during the preceding year,

prices for this component increased about 3-3/4 percent.

Producer prices of capital equipment also have reflected the

slowing in labor costs and excess capacity in manufacturing.

11. We have excluded used cars because their price movements, inthe short run, do not reflect current trends in labor and materialscosts.

Page 49: Fomc 19920818 g Bpt 219920813

II-44

Table 1

PRICE INDEXES FOR COMMODITIES AND MATERIALS 1

Percent change 2

1992 Memo:

Last To June 23 Yearobser- June to earlier

vation 1990 1991 23 3 date to date

1. PPI for crude materials4 July 6.0 -11.6 3.9 .2 1.8

la. Foods and feeds July -4.2 -5.8 5.6 -2.1 -.1la. Energy July 19.1 -16.6 1.5 1.1 2.3lb. Excluding food and energy July .6 -7.6 5.0 1.1 3.41c. Excluding food and energy,

seasonally adjusted July .7 -7.6 4.5 1.3 3.4

2. Commodity Research Bureau2a. Futures prices Aug. 11 -2.7 -6.5 .3 4.4 -4.22b. Industrial spot prices Aug. 10 .6 -11.3 5.3 .0 2.1

3. Journal of Commerce industrials Aug. 11 -2.4 -7.2 4.6 -.3 2.03a. Metals Aug. 11 -3.9 -7.1 4.9 2.5 4.5

4. Dow-Jones Spot Aug. 11 -1.7 -12.1 7.5 -2.6 -.2

5. IMF commodity index4 June -5.2 .7 .0 n.a. 1.95a. Metals June -1.1 -8.9 4.9 n.a. 1.75b. Nonfood agriculture June -3.5 1.3 3.3 n.a. 2.3

6. Economist (U.S. dollar index) Aug. 4 -4.4 -9.1 4.5 .1 .56a. Industrials Aug. 4 -3.2 -14.9 8.9 1.9 4.9

Not seasonally adjusted.Change is measured to end of period, fromWeek of the June Greenbook.Monthly observations. IMF index includesNot available

last observation of previous period.

items not shown separately.

Index Weights

Food Commodities

01Precious Metals

a

PPI for crude materials

CRB futures

CRB industrials

Journal of Commerce index

Dow-Jones

IMF index

Economist

41 41 1 18

14 57 14 14

100

12 88

58 17 25

55 45

50 50

1. Forest products, industrial metals, and other industrial materials.

1.2.3.4.

n.a.

Energy

OOthers'

El

Page 50: Fomc 19920818 g Bpt 219920813

II-45

Excluding motor vehicles and computers (the latter was absent from

the PPI before 1991), the PPI for capital equipment was up only

2-1/2 percent during the year ended in July, well under the pace

registered during the preceding two years.

Spot measures of industrial commodity prices, such as the

Journal of Commerce index, have risen on net so far in 1992.

Although broad indexes of these prices have changed relatively

little since the last Greenbook, the prices of several nonferrous

metals have moved up further. In contrast, the CRB futures index

has fallen sharply during the intermeeting period, mainly because of

declines in the prices of agricultural crops.

The declines in crop prices have been driven by the marked

improvement in U.S. crop conditions since midyear. The Department

of Agriculture's latest output projections, which are based on

conditions as of August 1, show corn production up 17 percent this

year, to a near-record level of 8.8 billion bushels. Soybean output

is expected to rise 5 percent this year, and production of spring

wheat is expected to attain a new high. The production of cotton,

though likely to be down from that of last year, will be larger than

in other recent years. Because of the cool summer, however,

development of the crops is lagging, and they may be more vulnerable

than usual to the threat of early frost. In addition, the prospects

for grain production elsewhere in the world have declined since

midyear, according to the USDA's latest assessment.

Page 51: Fomc 19920818 g Bpt 219920813

II-46

COMMODITY PRICE MEASURES *

-- Journal of Commerce Index, total- - Journal of Commerce Index, metals

Ratio scale, index(1980=100)

Total102101

98

95Jul Aug1992

Metals106105

102

99Jul Aug1992

CRB Spot Industrials

Ratio scale, index(1967=100)

1984 1985 1986 1987 1988 1989 1990

CRB Futures

Ratio scale, index(1967=100)

I I 1 91992 199:

* Weekly data, Tuesdays; Journal of Commerce data monthly before 1985

290 CRB Futures 2 12

210270

250 204

230 198Jul Aug1992

210

1903

Dotted lines indicate week oflast Greenbook.

CRB Industrials

Page 52: Fomc 19920818 g Bpt 219920813

DOMESTIC FINANCIALDEVELOPMENTS

Page 53: Fomc 19920818 g Bpt 219920813

III-T-1 1SELECTED FINANCIAL MARKET QUOTATIONS

(percent)

1992 1992 1992 Change from:1992 1992 1992 Change from:D e c- -- -----. ---. ----.- --. -------------C- -----Dec-Jan FOMCLows Jul 1 Jul 2 Aug 12

Short-term rates

Dec-Jan FOMCLows Jul 1 Jul 2

---------------..------

Federal funds 2

Treasury bills 3

3-month6-month1-year

Commercial paper1-month3-month

Large negotiable CDs3

1-month3-month6-month

Eurodollar1-month3-month

deposits 4

Bank prime rate

3.94

3.723.763.81

4.013.94

3.953.893.89

3.943.88

6.50

3.56 3.56 3.24

3.553.633.87

3.243.343.55

-. 70 -. 32

3.123.203.30

-.60-.56-.51

3.89 3.53 3.353.88 3.56 3.36

3.803.823.97

3.553.553.67

-. 43 -. 12-.43 -.14-.57 -.25

-.66 -.54 -.18-.58 -.52 -.20

3.273.283.35

-.68-.61-.54

3.81 3.75 3.253.81 3.75 3.31

6.50 6.00 6.00

-. 53-. 54-. 62

-. 28- .27-. 32

-.69 -.56 -.50-.57 -.50 -.44

-. 50 -. 50

Intermediate- and long-term rates

U.S. Treasury (constant3-year10-year30-year

Municipal revenue(Bond Buyer)

Corporate--A utilityrecently offered

Home mortgage rates 6

FELMC 30-vr. FRMFHLMC 1-yr. ARM

maturity)5.056.717.39

6.53

8.46

8.235.79

5.387.107.76

5.156.937.63

4.716.487.33

-.34-.23-.06

6.58 6.55 6.24

8.55 8.55 8.09

8.43 8.43 8.065.78 5.78 5.30

-.67 -.44-.62 -.45-.43 -.30

-.29 -.34 -.31

-.37 -.46 -.46

-.17 -.37 -.37-.49 -.48 -.48

1989 1992 Percent change from:

Record Lows FOMC Record 1989 FOMChighs Date Jan 3 Jul 1 Aug 12 highs lews Jul 1

Stock prices

Dow-Jones Industrial 3413.21 6/1/92 2144.64 3354.10 3320.83 -2.71 54.84 -.99NYSE Composite 233.66 8/3/92 154.00 226.75 229.99 -1.37 49.34 1.43AMEX Composite 418.99 2/12/92 305.24 383.01 386.46 -7.76 26.61 .90NASDAQ (OTC) 644.92 2/12/92. 378.56 568.99 570.85 -11.49 50.80 .33Wilshire 4121.28 1/15/92 2718.59 3971.45 4025.31 -2.33 48.07 1.36

I/ One-day quotes except as noted.2/ Average for two-week reserve maintenance period

closest to date shown. Last observation is averageto date for maintenance'period ending August 19, 1992.

3/ Secondary market.4/ Bid rate. for Eurodollar

deposits at 11 a.m. London time.5/ Based on one-day Thursday quotes

and futures market index changes.6/ Quotes for week ending

Friday previous to date shown.

Page 54: Fomc 19920818 g Bpt 219920813

Selected Interest Rates*

1989 1990 1991 1992

"1a Pri F Rnm tod

Fads*l FUndf

6' 7 79 /211992

&30 7/9 7/211992

7/31 &812Prcernt

) 1

7/31 8121989 1990 1991 1992

*Friday weeks are plotted through August 7, statement weeks through August 5.

Page 55: Fomc 19920818 g Bpt 219920813

DOMESTIC FINANCIAL DEVELOPMENTS

Bond markets rallied over the intermeeting period in the wake

of the July 2 cut in the discount rate and incoming information

pointing to a hesitant recovery and improved disinflationary

prospects. On July 2, money market interest rates declined about 30

basis points in response to the 1/2 percentage point reduction in

the discount rate and the associated drop in the federal funds rate.

Over the entire intermeeting period short-term interest rates fell

40 to 60 basis points. Treasury coupon yields are down by

comparable amounts with the largest declines in the three- to ten-

year maturities. Mortgage rates also are down appreciably over the

period, although recent declines in bond yields have not passed

through fully to fixed-rate mortgages, mostly because a surge in

refinancing activity has heightened investor concern about

prepayment risk. The discount rate cut prompted banks to lower the

prime rate by an equal amount, but the spread over funding costs

remains wide and lending standards evidently have not softened.

Meanwhile, broad indexes of stock prices have edged up, supported by

the declines in interest rates.

Falling long-term interest rates have sparked activity in

capital markets, though much has been associated with refinancing

higher cost debt. Businesses--including below-investment grade

firms--have been tapping the public bond markets in volume, with the

proceeds mostly covering bond calls and the paydown of bank loans

and commercial paper. The more favorable climate for bond offerings

and a less attractive market for IPOs have slowed deleveraging

activity. Households, too, evidently have rushed recently to take

advantage of the decline in mortgage rates, although this has yet to

show up in closings, and net mortgage originations have been slow.

Consumer credit declined again in June and weakness likely extended

III-1

Page 56: Fomc 19920818 g Bpt 219920813

111-2

MONETARY AGGREGATES(based on seasonally adjusted data unless otherwise noted)

Growth1992 1992 1992 1992 1992 Q4 91-

1991 1 1 Q2 May Jun Jul p Jul 92p

------------ Percent change at annual rates---------------------

16.5 9.8 14.64.3 0.0 0.52.2 -1.9 -0.7

------------ Percent change at annual

-3.1 11.6 11.9-3.8 -1.3 1.1-4.4 -1.8 -0.5

Levelsrates------------ bil. $

Jul 92p

Selected components

4. Ml-A

5. Currency6. Demand deposits

7. Other checkable deposits

8. M2 minus M12

9. Overnight RPs and Eurodollars, NSA10. General purpose and broker/dealer money

market mutual fund shares11. Commercial banks12. Savings deposits (including MMDAs)13. Small time deposits14. Thrift institutions15. Savings deposits (including MMDAs)16. Small time deposits

17. M3 minus M23

18. Large time deposits19. At commercial banks, net

4

20. At thrift institutions21. Institution-only money market

mutual fund shares22. Term RPs, NSA23. Term Eurodollars, NSA

MEMORANDA:5

24. Managed liabilities at commercialbanks (25+26)

25. Large time deposits, gross26. Nondeposit funds27. Net due to related foreign

institutions28. Other6

29. U.S. government deposits at commercialbanks7

5.6 14.9 9.1 10.1 -5.4 14.7 602.4

8.4 7.4 5.8 4.8 6.6 11.7 278.93.4 22.2 12.5 15.0 -15.6 17.7 315.6

12.4 19.2 11.0 22.3 0.7 6.7 358.7

1.1 0.0 -3.7 -4.8 -4.0 -6.2 2493.9

-7.9 15.4 -35.5 -66.1 26.9 -8.8 67.9

3.97.113.3

1.1-6.99.3

-16.8

1.00.919.2

-18.9-3.622.4

-24.2

-7.30.412.0-13.3-6.618.9-29.1

3.0-3.17.8

-16.7-2.918.8

-24.0

-5.7-3.84.7

-14.6-6.35.2

-17.8

-11.9-2.19.5

-16.8-7.35.2

-20.1

349.81259.8716.3543.6816.2418.0398.2

-5.6 -7.3 -10.5 -6.4 -7.5 -4.3 696.9

-11.7

-5.1-31.7

33.4-21.7-11.0

-20.4-18.2-29.6

27.0-6.0

-27.1

-18.6-14.4-37.0

20.1-5.0-24.1

-14.2-8.0

-40.7

35.5-11.6-50.2

-14.1-12.0-25.2

30.2-26.8-31.9

-19.4-22.1-6.9

48.1-48.0-25.7

----- Average monthly change in billions of dollars----

-0.6 -2.8 -2.6 -2.6 -1.0 -4.5-0.2 -5.7 -4.8 -3.2 -4.3 -6.6-0.5 2.8 2.3 0.6 3.3 2.1

389.8320.4

69.4

207.767.250.2

684.0385.8298.2

0.4 2.1 5.2 5.2 5.9 1.6 62.8

-0.9 0.7 -3.0 -4.5 -2.8 0.6 235.4

0.2 -1.5 1.3 -2.9 8.8 -3.7 22.1

1. Amounts shown are from fourth quarter to fourth quarter.2. Nontransactions M2 is seasonally adjusted as a whole.3. The non-HZ component of M3 is seasonally adjusted as a whole.4. Net of large denomination time deposits held by money market mutual funds and thrift institutions.5. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis.6. Consists of borrowing from other than commercial banks in the form of federal funds purchased, securities

sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from 'Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estil

7. Consists of Treasury demand deposits and note balances at commercial banks.p - preliminary

1. Ml2. M23. M3

Page 57: Fomc 19920818 g Bpt 219920813

III-3

into July, judging from data on consumer loans at banks. State and

local governments also have been availing themselves of reduced bond

rates by large refunding offerings. Finally, while the RTC has been

dormant, federal borrowing has remained strong in recent months

owing to persistently large deficits.

With credit demands concentrated in longer-term markets, bank

credit was about flat, and the broad monetary aggregates declined

further in July. Ml rebounded, but households continued to draw

down their M2 balances and to limit increases in debt, as well as to

take advantage of the higher yields available on capital market

instruments. This process has been aided by aggressive cuts in

retail deposit rates by banks as their loans continued to contract.

Monetary Aggregates and Bank Credit

M2 is estimated to have fallen at a 1-1/4 percent annual rate

in July, despite the further decline in short-term market interest

rates, which boosted liquid deposits. M3, posting its fifth

consecutive monthly decline, fell at a 1-3/4 percent annual pace.

Both broad aggregates lie well below their annual target ranges.

Growth in retail deposits in July was moderated by sharp cuts

in deposit interest rates, likely motivated by a surfeit of retail

deposits in relation to weak lending. In addition, however, it is

possible that deposit rates are being pulled down by newly effective

provisions of the FDIC Improvement Act (FDICIA), which, beginning in

mid-June, impose ceilings on deposit rates that can be offered by

institutions that are not well capitalized. Further, FDICIA

restrictions that preclude inadequately capitalized institutions

from issuing brokered deposits may have contributed to the

contraction of retail time deposits over June and July. Finally,

the steepness of the yield curve continued to play a prominent role

Page 58: Fomc 19920818 g Bpt 219920813

III-4

COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT 1(Percentage change at annual rate, based on seasonally adjusted data)

Dec.1990to

Dec.Category 1991

1992 1992Ql Q2

1992 1992 1992May. Jun. Jul. p

1. Total loansand securitiesat banks

2. Securities

3. U.S. government

4. Other

5. Loans

6. Business

7. Real estate

8. Consumer

9. Security

10. Other

Commercial bank credit

3.9

17.6

23.8

1.4

-0.2

-2.8

2.9

-3.9

21.6

-2.7

2.1

6.6

11.1

-7.7

0.5

-6.4

2.6

-0.9

45.4

3.0

2.1

14.6

19.5

-2.1

-2.4

-7.2

0.5

-2.2

24.3

-8.9

-0.8

11.8

15.6

-0.7

-5.5

-7.3

1.1

-5.0

60.5

-11.5

1.8

11.2

17.6

-11.0

-1.8

-8.2

-1.4

1.3

44.4

-3.9

-0.2

14.5

14.6

13.9

-5.6

-5.0

-2.6

-1.3

-67.0

-9.1

11. Business loansnet ofbankers acceptances

12. Loans at foreignbranches 2

13. Sum of lines 11 and 12

14. Commercial paperissued bynonfinancial firms

15. Sum of lines 13 and 14

16. Bankers acceptances,U.S. trade-related 3

17. Finance companyloans to business 4

18. Total (sum oflines 15, 16,and 17)

Short- and intermediate-term business credit

-2.5 -6.7 -7.0 -7.8 -7.2 -6.5

-1.6

-2.4

-10.4

-3.9

-40.9

-8.0

14.9

-4.0

26.3

-5.7

-3.9

-5.4

-5.3

-7.7

-12.7

-8.6

84.6

-3.7

6.0

-1.9

44.4

-4.7

-5.1

-4.8

-16.2 -22.9 -27.3 -27.7 -37.8 n.a.

1.4 -1.9 -1.5 0.0 5.6 n.a.

-2.9 -3.9 -4.9 -6.7 -0.9 n.a.

1. Average of Wednesdays. Data are adjusted for breaks caused by reclassifications.2. Loans at foreign branches are loans made to U.S. firms by foreign branches of

domestically chartered banks.3. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic

shipment and storage of goods. Based on average of data for current and precedingends of month.4. Based on average of data for current and preceding ends of month.5. June 1992 data.p--Preliminary.n.a.--Not available.

Level(billions

ofdollars)1992Jul. p

2,869.3

789.3

614.8

174.5

2,080.0

596.6

878.7

359.6

60.9

184.2

589.6

25.2

614.8

139.8

754.6

24.65

298.85

1,080.95

Page 59: Fomc 19920818 g Bpt 219920813

III-5

in drawing-balances from M2 to higher yielding capital market

instruments.

Incentives for shifting out the yield curve were manifested in

the July contraction in M2-type money funds. Typically, these funds

are boosted by declining market rates, because their yields lag

behind. But last month investors apparently eschewed the temporary

yield differential favoring money funds, and instead continued to

seek returns posted at the long end of the yield curve. Net flows

into stock and bond mutual funds totalled $17 billion in June, and

anecdotal reports indicate an even larger volume in July. Some

banks are encouraging their depositors to transfer balances to stock

and bond funds with which the banks have management or service

contracts.

In contrast to the behavior of M2-type money funds,

institution-only money funds saw stronger inflows in July in

response to the decline in short-term market rates. Like M2-type

money funds, institution-only money funds typically see temporary

gains from declining market rates. However, investors in

institution-only money funds are motivated primarily by cash

management needs and thus may be less willing to shift out the yield

curve into capital market instruments. With depositories facing

weak credit demands, runoffs of large time deposits accelerated in

July, thus providing some offset in M3 to the acceleration in

institution-only money funds. On balance, the non-M2 component of

M3 declined in July, but less rapidly than the previous month.

Bank credit was about unchanged in July, with a decline in

loans offset by a modest pickup in securities acquisitions. In

part, the rise in securities acquisitions reflected the issuance of

warrants, which the state of California is using as a stop-gap

Page 60: Fomc 19920818 g Bpt 219920813

Loans at Weekly Reporting Banks Selected by Capital Status *(Growth from year-earlier month)

Percent-i 30

Under Capitalized **

*.... Adequately Capitalized

1989 1990 1991

* C al status is determined as of the Call Report for 3/31/92.** Ir, -s undercapitalized, significantly undercapitalized, and c. Ily undercapitalized banks.

1992

Page 61: Fomc 19920818 g Bpt 219920813

III-7

source of payment to creditors until it can pass a 1993 budget. 1

Business loans continued to shrink, although at a somewhat slower

pace than in recent months because of a pickup at branches and

agencies of foreign banks. That rise was concentrated at European

and Canadian institutions, who have had relatively comfortable

capital positions, while loans at Japanese branches and agencies

remained flat. Consumer loans fell in July, but after adjusting for

securitizations, grew at a 3 percent annual rate. Real estate loans

contracted for the second straight month; anecdotal evidence points

to loan sales and securitizations as key reasons for the weakness,

chargeoffs in excess of seasonal norms also may be a factor.

Results of the August Senior Loan Officer Opinion Survey were

consistent with the view that weak loan demand is the primary factor

behind weak loan growth at banks. Although roughly 12 percent of

respondents reported a pickup in loan demand over the last three

months, about 17 percent reported that demand weakened. The vast

majority of respondents indicated no change in underwriting

standards since the May survey and various lending terms were

reported as unchanged in contrast to earlier surveys, which had

indicated some tightening.

Declines in loans have occurred throughout the year at banks

with widely varying capital positions, suggesting that weak credit

demands have played a role. Recently, though, disparities have

become more pronounced between loan growth at under-capitalized

banks and those with stronger capital positions, perhaps indicating

that better capitalized banks are becoming poised for renewed loan

growth. On a year-over-year basis, weekly reporting banks that are

1. In July, depositories accepted nearly $2 billion of thesewarrants from creditors of the state of California. The effect, ona month average basis, was to boost securities acquisitions in Julyby some $800 million. To date, none of the California warrants hasbeen redeemed.

Page 62: Fomc 19920818 g Bpt 219920813

III-8

GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS(Monthly rates, not seasonally adjusted, billions of dollars)

-----------------1992-------- ---- ----

1990 1991 Q1 Q2P May p Junep JulyP

Corporate securities - totall 19.82 32.15 40.97 41.28 46.42 48.36 44.69Public offerings in U.S. 17.68 29.36 37.63 38.01 42.42 44.40 42.48

Stocks--total 2 1.95 5.44 7.53 7.08 6.92 9.00 6.48Nonfinancial 1.03 3.72 5.14 4.99 5.59 5.74 3.02

Utility .35 .42 .79 1.24 1.08 1.67 .56Industrial .68 3.30 4.35 3.75 4.51 4.07 2.46

Financial .92 1.72 2.38 2.09 1.32 3.25 3.46

Bonds 15.73 23.92 30.10 30.93 35.50 35.40 36.00Nonfinancial 5.62 9.52 13.41 12.34 12.50 13.50 19.00

Utility 1.98 2.96 4.98 5.45 5.30 6.20 9.40Industrial 3.64 6.56 8.43 6.89 7.20 7.30 9.60

Financial 10.11 14.40 16.69 18.59 23.00 21.90 17.00

By quality 3

Aaa and Aa 3.42 3.72 4.13 2.88 4.20 2.75 6.45A and Baa 6.44 12.09 15.81 15.04 15.11 16.95 16.45Less than Baa .15 1.03 2.64 3.31 3.10 4.12 4.13No rating (or unknown) .04 .02 .10 .02 .01 .02 .03

Memo items:

Equity-based bonds4 .40 .63 1.01 .52 .55 .74 .16Mortgage-backed bonds 2.43 2.99 4.83 6.41 7.13 8.14 5.00Other asset-backed 3.27 4.08 2.63 3.26 5.95 3.42 3.94Variable-rate notes .80 .84 .90 2.14 2.92 2.41 .30

Bonds sold abroad - total 1.92 2.33 2.61 2.48 2.97 3.10 2.00Nonfinancial .46 1.00 .96 1.06 1.13 1.85 .80Financial 1.46 1.33 1.64 1.42 1.84 1.25 1.20

Stocks sold abroad - total .22 .46 .74 .79 1.04 .86 .21Nonfinancial .10 .38 .53 .67 1.02 .66 .09Financial .12 .08 .21 .12 .01 .21 .12

1. Securities issued in the private placement market are not included. Total reflectsgross proceeds rather than par value or original discount Donds.2. Excludes equity issues associated with equity-for-equity swaps that

in restructurings. Such swaps totaled $9.4 billion in 1990.3. Bonds categorized according to Moody's bond ratings, or to Standard

unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.4. Includes bonds convertible into equity and bonds with warrants that

holder to purchase equity in the future.p--preliminary.

have occurred

and Poor's if

entitle the

Page 63: Fomc 19920818 g Bpt 219920813

III-9

well capitalized under FDICIA are now seeing slower runoffs than in

recent months (chart). Adequately capitalized banks are running off

loans at about the same rate as earlier this year, but runoffs in

loans at under-capitalized banks have accelerated, especially over

the last few months.

Business Finance

Corporate bond yields fell in July to their lowest levels since

the early 1970s, prompting nonfinancial corporations to bring to

market a record $19 billion of public bond offerings. A large

portion of the bonds issued in July were earmarked for replacing

existing higher cost debt. For example, a number of firms called

bonds issued in the 1960s and early 1970s and simultaneously offered

new debt. In addition, some portion undoubtedly was used to pay

down short-term obligations, thereby contributing to the weakness in

short-term business credit last month.

Adding to July's strong bond issuance was heavy junk bond

issuance. As in the first half of the year, most of last month's

junk bond issues were dedicated to refinancing higher cost bank debt

and bonds. However, unlike earlier this year and in 1991, many of

the firms issuing junk bonds did so without also accessing the

public equity market. Equity investors have become more selective,

causing several proposed reverse LBOs--including those of Dr. Pepper

and Revlon--to be postponed or cancelled.

A reduced pace of reverse LBOs contributed to an overall

slowing in public equity offerings by nonfinancial corporations.

Besides reverse LBOs, other initial public offerings (IPOs)

weakened, as investors were soured by the poor performance of recent

IPOs in the subsequent secondary market. Furthermore, July saw only

a smattering of large offerings by established companies, which had

bolstered issuance in previous months. Indeed, only General Motors

Page 64: Fomc 19920818 g Bpt 219920813

Gross Interest Payments to Cash Flow*Percent

1970 1972 1974 1976 1978

*Economic profits before taxes plus gross interest payments and depreciation

1980 1982 1984 1986 1988 1990 1992

Page 65: Fomc 19920818 g Bpt 219920813

III-ll

and Freeport-McMoran, with preferred offerings, came to the public

market in any significant size in July. A large, private issue of

preferred stock by Unocal offset, to some extent, the slowdown in

public issuance. The volume of public offerings picked up somewhat

in the first week of August, pointing toward a stronger month than

July.

After languishing throughout most of July, major stock price

indexes rebounded sharply in the last few days of July with the fall

in long-term interest rates. Stock prices have since backed off, as

worries about the economic outlook returned to the forefront. On

balance, the broader indexes are up 1/2 to 1-1/2 percent since the

last FOMC meeting.

Other incoming signals of the health of businesses were

generally positive. Bond defaults in the first half of this year

ran at a 5 percent annual rate, down from the 10 percent level of

the past two years. Furthermore, during the second quarter, the

number of downgraded firms dropped to its lowest level since the

third quarter of 1988, and upgrades maintained their slow upward

march. Falling rates have eased the interest payment burdens of

firms; interest expense as a share of business cash flow now stands

at a level last seen in the mid-1980s (chart). Finally, business

failures fell slightly in the first quarter of 1992, though they

remain at a high level.

The financial strength of U.S. commercial banks continued to

improve during the second quarter, but areas of concern remain.

Profits grew as further declines in interest rates boosted net

interest margins. Loan credit quality also improved; nonperforming

loans at nineteen of the top twenty-five banking organizations

declined as a percent of total assets.

Page 66: Fomc 19920818 g Bpt 219920813

III-12

TREASURY AND AGENCY FINANCING 1(Total for period; billions of dollars)

1992

Q2 Q3p July Aug.p Sept.p

Treasury financing

Total surplus/deficit (-)

Means of financing deficit:

Net cash borrowingfrom the public

Marketable borrowings/repayments (-)

BillsCoupons

Nonmarketable

Decrease in the cash

balance

Memo: Cash balanceat end of period

2

Other

Federally sponsored creditagencies, net cash

borrowing 3

FHLBs

FHLMC4

FNMAFarm Credit BanksSLMA

FAMC5

-28.4

62.5

52.82.4

50.49.7

-27.2

47.0

-6.9

-81.6 -41.1 -34.5

76.6

78.921.257.7-2.3

2,6

44.4

2.4

28.6 37.2 10.8

32.914.118.8-4.3

9.5

37.5

3.0

35.74.6

31.11.5

2.0

35.5

-4.7

10.22.47.8.6

-8.9

44.4

4.2

8.1

.5

2.57.7-.8

-1.2

.5

1. Data reported on a not seasonally adjusted, payment basis.2. Includes checks issued less checks paid, accrued items and other

transactions.3. Excludes mortgage pass-through securities issued by FNMA and FHLMC.4. Data for April and May only.5. Federal Agricultural mortgage Corporation.p--projected.Note: Details may not add to totals due to rounding.

-6.0

TREASURY AND AGENCY FINANCING!

(Total for period: billions of dollars)1992

Q2 Q3 p July Aug.p Sept. p

Page 67: Fomc 19920818 g Bpt 219920813

III-13

As capital markets warmed to banks earlier this year, they

issued a large volume of both equity and debt. Banks already have

raised about the same amount of equity funds as they raised in all

of 1991. Even in July. when the performance of bank shares was

relatively weak, equity issuance by banks continued unabated. Banks

have responded to the sharp decline in spreads on bank debt this

year by issuing debt at a pace ahead of last year's record. The

need to bolster capital ratios in order to pursue acquisitions and

access to the brokered CD market likely have been two factors

spurring banks to tap the subordinated debt and equity markets.

Treasury and Sponsored Agency Financing

The projected third quarter deficit of $82 billion will likely

be financed by $77 billion of marketable borrowing, leaving the

Treasury's cash balance little changed on the quarter. A projected

$14 billion increase in marketable borrowing during the third

quarter largely reflects a seasonal bounceback from a second quarter

level of borrowing that had been depressed by paydowns of large cash

management bills following the April tax season. Gross weekly bill

auctions are expected to be unchanged over the third quarter, while

gross coupon auction sizes are likely to be unchanged to up $250

million. The $4.15 trillion debt ceiling affords the Treasury about

$225 billion of room for new issuance. The staff anticipates that

the debt ceiling will be reached around the end of the first quarter

of 1993.

Three sources of uncertainty about Treasury issuance plans have

been the focus of market participants' attention over the

intermeeting period. First, ambiguous comments by Treasury

officials renewed speculation that the Treasury would scale back its

long-term debt issuance, shortening its average maturity to take

advantage of the steep yield curve and perhaps to encourage some

Page 68: Fomc 19920818 g Bpt 219920813

III-14

decline in long-term rates. In the event, the Treasury announced

that the composition and total amount of its midquarter refunding

would be unchanged from the previous two refundings; bond yields

backed up slightly on the announcement. Second, debt restructuring

agreements by Argentina and Brazil left open the possibility that

those governments would be large net purchasers in the market of

long-dated Treasury zero-coupon securities. As yet, they have not

appeared in the market. Third, Treasury officials reported that a

decision on the setup of an experiment with single-price auction

awards would be made within the next two months, but trials with

more involved iterative auctions may be several years away.

Municipal Securities

Over the intermeeting period, the ratio of tax-exempt to

taxable bond yields dropped to its lowest level since the enactment

of the Tax Reform Act of 1986.2 Since the end of last year, the

ratio has moved steadily downward, as the result of both strong

household demand for tax-exempt securities and weak net issuance by

state and local governments. The downward movement in the ratio

accelerated in July with an unusually large volume of bond

redemptions, which are estimated to have amounted to about 1 percent

of the outstanding stock of municipal bonds. The ratio should

continue to face downward pressure, as the volume of redemptions

will remain heavy over the course of the year. The high level of

redemptions reflects bonds issued in 1982 that had since been pre-

funded. Market analysts expect the volume of redemptions in the

third quarter to total about $20 billion, nearly equal to the entire

amount in 1991.

2. On an after-tax basis, the relative attractiveness of tax-exempt bonds decreased with the reduction in marginal tax rates inthe Act.

Page 69: Fomc 19920818 g Bpt 219920813

III-15

GROSS OFFERINGS OF MUNICIPAL SECURITIES(Monthly rates, not seasonally adjusted, billions of dollars)

1991 1992 1992

1990 1991 Q4 Q1 Q2 May June July p

Total offerings 1 13.49 16.60 17.00 16.37 21.04 14.85 29.30 18.39

Total tax-exempt 13.24 16.18 16.59 15.82 20.29 14.50 28.54 18.30Long-term 2 10.26 12.84 14.96 14.20 16.60 14.16 20.50 15.91

Refundings 1.68 3.11 3.47 5.12 5.81 4.90 6.41 7.53New capital 8.58 9.73 11.49 9.08 10.79 9.26 14.09 8.38

Short-term 2.98 3.34 1.63 1.62 3.69 .34 8.04 2.39Total taxable .25 .42 .41 .55 .75 .35 .76 .09

p--preliminary1. Includes issues for public and private purposes.2. Includes all refunding bonds, not just advance refundings.

Changes in long-term debt ratings in the second quarter present

a mixed picture of the credit quality trend in the municipal sector.

Standard & Poor's upgraded 25 more issues than it downgraded;

however, most of its upgrades owed to improved ratings for two large

utilities. Moody's upgraded about the same number of issues that it

downgraded.

The credit ratings of two major states, California and

Illinois, have been lowered in the past month. Standard & Poor's

and Moody's both downgraded the state of California, primarily

because the inability of the legislature and state administration to

come to agreement on a budget for fiscal year 1993, which began on

July 1. As a result, California has been forced to pay most

creditors, including state employees, with registered warrants.

Although local banks were accepting these warrants for deposit in

July, several of the largest banks recently have announced that they

will no longer accept them, portending a possible disruption of

state government operations. Standard & Poor's dropped Illinois'

3. Moody's cut the rating on California general obligation bondsfrom Aal to Aa. Standard & Poor's followed shortly thereafter witha rating cut to A+ from AA. California had been rated AAA by bothissuers until near the end of 1991, when the state's budget processbegan to unravel.

Page 70: Fomc 19920818 g Bpt 219920813

III-16

STANDARD AND POOR'S MUNICIPAL LONG-TERM DEBT RATING ACTIONS(Number of rating revisions by region)

Region 1985 1986 1987 1988 1989 1990 1991 1992:1 1992:2

WestUpDown

SouthwestUpDown

NorthwestUpDown

MidwestUpDown

SoutheastUpDown

NortheastUpDown

8674

1955

89

18862

3067

3129

22251

2255

187

2196

3666

26132

617

56

33

820

121111

793

362 154 114 170296 269 185 138

140 145465 607

Memo: Volume (billionsUp n.a.Down n.a.

of dollars)38.9 17.011.6 25.0

18.0 13.4 18.8 8.1 6.1 7.722.6 24.0 47.8 51.5 20.5 2.3

Source: Standard and Poor's Credit Week

TotalUpDown

101106

150145

1. Of these upgrades, 88 represent Kentucky school districts that wereas a result of state-implemented funding reforms.

upgraded

Page 71: Fomc 19920818 g Bpt 219920813

III-17

rating from AA to AA- last month, pointing to a $1 billion deficit

in the 1992 operating budget and the prospect of another budget

deficit in fiscal 1993. Moody's also is considering downgrading

Illinois.

Mortgage Markets

Over the intermeeting period, interest rates on conventional

fixed-rate mortgages declined by nearly 40 basis points to 8.06

percent, with the bulk of the decline occurring before mid-July.

Since that time, mortgage rates have not moved down with rates on

Treasury coupons owing to concerns about prepayment risk. This

decline in mortgage interest rates has prompted a resurgence of

mortgage refinancings. The Mortgage Bankers Association's weekly

index of refinancing activity (nsa) spiked in July--to a level close

to that recorded in January--before easing slightly in early August

(chart). A Freddie Mac index, based on a broader survey of mortgage

lenders, also indicates that the proportion of refinancing

applications rose markedly in July.

The latest MBA data indicate that just over one-half of total

mortgage applications at mortgage banking companies have been to

refinance outstanding mortgages. Anecdotal reports from mortgage

bankers also suggest that the current "fallout" rate on new

applications is lower than in January, with the bulk of applications

4leading to contract closings. The recent decline in interest

rates on both fixed and adjustable rate mortgages, plus the

resulting higher levels of refinancing activity, have raised staff

4. In January, lenders reported that many borrowers, expectingfurther declines in mortgage rates, were submitting applications atmore than one lender without locking in a rate. When mortgage ratesunexpectedly increased, borrowers did not take their applications toclosing. Lenders refer to the proportion of applications that donot lead to a loan as the fallout rate. Following the disappointingexperience of borrowers earlier in the year, lenders now report thatborrowers are locking in available rates more quickly, resulting ina lower fallout rate and preventing--at least temporarily--origination bottlenecks at mortgage lenders.

Page 72: Fomc 19920818 g Bpt 219920813

III-18

Refinancing Indexes (N.S.A.)

Percent of Originations

Monthly

- FHLMC Refinancing Volume (left scale)

1990 1991

Source: Mortgage Bankers Association; Federal Home Loan Mortgage Corporation.

FRM to ARM Spread vs. One-Year ARM Discount

March 16, 1990= 100

1992

Percent

Monthly

One-Year ARM Discount

S\ ARM to FRM Spread

II I i i I I i I I I1989

Source: Federal National Mortgage Association.

1990 1991 1992

2000

1750

1500

1250

1000

750

500

250

0

4.2

3.6

Page 73: Fomc 19920818 g Bpt 219920813

III-19

estimates of mortgage interest savings for households. Owing to the

cumulative refinancing of FRMs and resetting of ARMs in 1991 and

1992, total interest savings at an annual rate (not adjusting for

closing costs) are estimated to be about $18.5 billion in 1992 and

$25 billion in 1993, assuming no further change in rates.

Prices of mortgage securities in the secondary market, too,

have weakened relative to prices of comparable maturity Treasuries

owing to greater prepayment premiums. In particular, yield spreads

on current coupon agency pass-throughs have widened about 20 to 25

basis points since mid-July. Investors' concerns in the secondary

market have been most apparent in the interest-only (IO) mortgage

strips sector, where prices have dropped by 20 percent to 30 percent

or more since the beginning of July. 10 prices are particularly

sensitive to accelerating mortgage prepayments because the value of

IO cash flows depends almost entirely on how long the mortgage loans

are outstanding.

The spread between interest rates on thirty-year, fixed-rate

mortgages (FRMs) and initial rates on adjustable-rate mortgages

(ARMs) remains above 250 basis points, but has narrowed slightly

since the beginning of the year, as long-term Treasury rates have

declined and lenders have reduced discounts offered on ARM start

rates (chart). With the near-record interest rate spread between

ARMs and fixed-rate mortgages, the origination volume of ARMs has

picked up in recent months, although their share of total

originations remained relatively small. According to Fannie Mae,

the share of thirty-year fixed-rate mortgages stabilized around

50 percent in May and June, as the rise in the proportion of

fifteen-year, fixed-rate mortgages halted.

The available data for mortgage credit indicate that growth

remained weak in recent months. Real estate loans at commercial

Page 74: Fomc 19920818 g Bpt 219920813

III-20

MORTGAGE-BACKED SECURITY ISSUANCE(Monthly averages, billions of dollars, NSA unless noted)

Federally relatedpass-through securities Multiclass securities

Total Fixed- ARM- Private FNMA FHLMC Agency(SA) Rate backed Total issues REMICs REMICS strips

1988 12.4 10.2 2.3 6.8 5.0 .9 .9 n.a.1989 16.5 14.1 2.7 8.4 1.6 3.1 3.2 .31990 19.7 17.2 2.4 11.5 2.4 5.1 3.4 .61991 22.2 20.4 2.0 18.4 3.0 8.5 6.0 .9

1991-Q3 24.5 23.7 2.0 22.6 3.6 10.4 7.1 1.5Q4 22.6 22.4 2.5 23.5 2.9 11.2 7.3 2.1

1992-Q1 35.1 29.1 2.0 23.5 4.8 11.1 7.0 .6Q2 p 42.2 36.7 3.6 33.2 5.4 14.4 12.4 1.0

1992-Jan. 32.8 25.4 1.5 20.3 4.7 11.0 4.1 .5Feb. 33.9 28.6 1.7 17.6 5.5 7.3 4.2 .6Mar. 38.6 33.4 2.8 32.1 4.2 14.8 12.5 .6Apr. r 44.3 37.0 3.0 24.8 3.9 9.2 11.7 .0May r 47.5 39.6 4.0 39.9 7.1 19.1 13.0 .7June p 34.6 33.5 3.8 34.9 5.3 14.8 12.6 2.2

1. Excludes pass-through securities with senior/subordinated structures.p--preliminary r--revised n.a.--not available

Page 75: Fomc 19920818 g Bpt 219920813

III-21

banks rose at only a 1/2 percent pace in the second quarter, and, as

noted above, declined in July. Gross issuance of federal agency

pass-throughs declined to a seasonally adjusted $34.6 billion in

June, down from May's record pace of $47.5 billion (table). Net

issuance, while rising in the second quarter, remained at a low

level owing to the sluggish housing market.

Gross agency MBS issuance in the first half of 1992 was 85

percent ahead of the same period last year. Moreover, offerings of

private-label mortgage securities in the first half of 1992 exceeded

levels in last year's first half by 120 percent, owing partly to

increased sales by the RTC. Part of the rise represented stronger

issuance of adjustable-rate pass-throughs, which was up 135 percent

for agency securities and 100 percent for private-label issues

compared to the same period last year. At the half-way mark, it

appears that both pass-through and CMO offerings for the agency and

private-label sectors will set new records in 1992, despite somewhat

subdued mortgage originations, as securitizations account for a

still greater share of financings.

Consumer Credit

Consumer installment credit outstanding contracted at a

1-3/4 percent seasonally adjusted annual rate in June, following

declines of 6 percent and 1-1/2 percent in April and May,

respectively. The decline was concentrated in auto credit, which

fell sharply in June. Revolving credit grew at a 4-1/4 percent rate

in June, somewhat faster than the pace of the previous two months,

but still well below even the reduced pace of 1991. For the second

quarter as a whole, consumer installment credit declined at a 3

percent annual rate, the steepest quarterly drop since the second

quarter of 1980.

Page 76: Fomc 19920818 g Bpt 219920813

III-22

CONSUMER CREDIT(Seasonally adjusted)

Memo:Percent change Outstandings(at annual rate) (billions of

dollars)1992 1992 1992

19891 1990 1991 Q1 Q2p Mayr June p Junep

Installment 5.8 2.6 -1.0 -. 2 -3.0 -1.5 -1.7 721.9

Auto 1.4 -2.4 -7.6 -1.3 -7.8 -2.5 -12.9 257.0Revolving 15.2 11.9 8.9 4.1 3.0 1.5 4.2 247.1Other 4.2 .8 -2.3 -3.6 -4.0 -3.7 5.1 217.8

Noninstallment 3.9 -3.5 -10.0 17.5 .5 9.6 -19.2 55.1

Total 5.6 2.1 -1.7 1.0 -2.8 -. 7 -2.9 777.1

1. Growth rates are adjusted for discontinuity in data between December 1988 andJanuary 1989.

r--revised. p--preliminary.Note: Details may not add to totals due to rounding.

CONSUMER INTEREST RATES(Annual percentage rate)

19921989 1990 1991 Feb. Mar. Apr. May June

At commercial banksNew cars (48 mo.) 12.07 11.78 11.14 9.89 ... ... 9.52 ...Personal (24 mo.) 15.44 15.46 15.18 14.39 ... ... 14.28 ...Credit cards 18.02 18.17 18.23 18.09 ... ... 17.97 ...

At auto finance cos.New cars 12.62 12.54 12.41 10.19 10.92 11.07 10.67 10.25Used cars 16.18 15.99 15.60 14.00 14.19 14.11 14.01 13.89

1. Average of "mostthe first week of the

2. Average rate formaturity.

common" rate charged for specifiedmid-month of each quarter.all loans of each type made during

type and maturity during

the month regardless of

August 7, 1992Mortgage and Consumer Finance

Page 77: Fomc 19920818 g Bpt 219920813

III-23

The June decline in auto credit is consistent with anecdotal

evidence suggesting that households continue to substitute leasing

or home equity borrowing for more traditional loans when financing

auto purchases. Home equity lending at commercial banks grew at a

five percent rate in June. Although there are no comprehensive data

on the aggregate volume of consumer leasing activity, motor vehicle

leasing (passenger cars and commercial vehicles) at domestic finance

companies has been rising steadily over the past four months; in

June, leasing was up about 3-1/2 percent from the May level.

Although data on consumer loan rates for July and August will

not be available until late this month, anecdotal reports suggest

that auto loan rates may have eased further following the July 2

discount rate cut. Interest rates on new car loans at the domestic

captive auto finance companies dropped in the April-June period

after rising in the first quarter. Used car loan rates at these

companies have shown a similar pattern. Credit card issuers also

appear to continue to lower rates selectively to more creditworthy

borrowers.

Issuance of securities backed by consumer loans in the second

quarter about matched the pace seen in the first quarter, but was

well under that of 1990 and 1991 (chart). Credit card-backed issues

have been particularly slow this year, with only three banks placing

a total of $2.4 billion. In part, this slowdown reflects sluggish

growth in consumer debt; moreover, improved capital ratios and

cheaper on-balance-sheet financing have also reduced the needs of

banks to securitize these assets. In contrast, auto finance

companies, faced with increasing auto sales and seeking lower.

funding costs, have relied heavily on the asset-backed market this

year. Spreads have recently been very tight between yields on

securities backed by auto loans and Treasury securities of

Page 78: Fomc 19920818 g Bpt 219920813

III-24

Gross Public Issuance of Consumer Asset-Backed Securities(Monthly Averages)

Millions of Dollars-- 4000

i Other

SRevolving

- fIAuto

I/P

-- 3600

3200

2800

-- 2400

-1 2000

-1 1600

-- 1200

-- 800

L1991 1992

~N~~

1987 1988 1989 1990

Page 79: Fomc 19920818 g Bpt 219920813

III-25

comparable maturity. As a result, securitization of auto loans was

brisk in the first quarter, and fell only slightly off this pace in

the second quarter. To the extent that these spreads remain tight,

and auto sales continue at their recent pace, industry sources

expect issuance of auto loan-backed securities to grow in coming

months.

Page 80: Fomc 19920818 g Bpt 219920813

INTERNATIONAL DEVELOPMENTS

Page 81: Fomc 19920818 g Bpt 219920813

INTERNATIONAL DEVELOPMENTS

Merchandise Trade

The U.S. merchandise trade deficit in May was $7.4 billion

(seasonally adjusted, Census basis) compared with $7.1 billion

(revised) in April. Nonagricultural exports fell $1/2 billion in

May, the third consecutive month of decline; the decreases in April

and May were primarily in exports of aircraft. Non-oil imports

declined $3/4 billion in May with the decrease spread among most

major trade categories. A drop in the quantity of imported oil in

May was more than offset by an increase in its price (by about $1.20

per barrel). Data for June will be released on August 19.

U.S. MERCHANDISE TRADE: MONTHLY DATA(Billions of dollars, seasonally adjusted, Census basis)

Exports ImportsTotal Ag. NonAg. Total Oil Non-oil Balance

1991-Jul 35.2 3.4 31.8 40.8 4.1 36.8 -5.6Aug 34.5 3.3 31.2 41.1 4.5 36.5 -6.6Sep 35.3 3.3 32.0 41.8 4.5 37.2 -6.5

Oct 36.8 3.6 33.3 42.7 4.1 38.6 -5.9Nov 37.3 3.5 33.7 41.4 4.1 37.2 -4.1Dec 36.1 3.7 32.3 41.7 3.9 37.8 -5.6

1992-Jan 35.5 3.6 31.9 41.3 3.6 37.6 -5.8Feb 37.7 3.7 33.9 40.9 3.3 37.6 -3.3Mar 37.1 3.5 33.6 42.7 3.4 39.2 -5.6

Apr 36.4 3.8 32.7 43.5 4.0 39.5 -7.1May 35.5 3.3 32.2 42.9 4.1 38.7 -7.4

Source: U.S. Department of Commerce, Bureau of the Census.

For April-May combined, exports declined 3 percent from the

first-quarter average and imports rose 4 percent. As a result, the

deficit increased to an annual rate that was the largest quarterly

deficit since 1990-Q4.

IV-1

Page 82: Fomc 19920818 g Bpt 219920813

IV-2

MAJOR TRADE CATEGORIES(Billions of dollars, BOP basis, SAAR)

Year 1991 1992 $ Change1991 Q2 Q3 Q4 01 Q2-e Q2e-Q2 Q2e-Qi

Trade Balance -73.4 -65.6 -80.7 -74.2 -69.9 -100.2 -34.6 -30.3

Total U.S. Exports

Agricultural ExportsNonagric. Exports

Industrial Suppl.GoldFuelsOther Ind. Suppl.

Capital GoodsAircraft & PartsComputers & PartsOther Machinery

Automotive ProductsTo CanadaTo Other

Consumer GoodsOther Nonagric.

416.0 413.3 416.6 431.4 431.3 420.3

40.1 37.5 40.7 43.2 43.2 41.6375.8 375.8 375.9 388.2 388.1 378.7

101.83.6

14.383.9

167.036.427.3

103.3

40.022.817.5

101.33.2

13.085.2

169.438.727.2

103.4

39.721.917.8

100.53.4

12.784.3

166.735.426.8

104.5

43.725.018.7

100.03.6

14.781.8

176.340.827.9

107.5

41.723.118.6

99.73.8

13.982.0

176.342.627.4

106.3

42.920.822.1

98.43.4

13.082.0

168.634.628.1

105.9

45.522.622.9

45.9 44.5 44.9 48.2 47.9 47.521.0 20.9 20.1 22.1 21.3 18.7

7.0 -11.0

4.1 -1.62.9 -9.4

-2.90.20.1

-3.2

-0.8-4.20.92.5

-1.3-0.4-0.9-0.0

-7.7-8.1

0.8-0.4

5.8 2.60.7 1.85.1 0.8

3.0 -0.4-2.3 -2./

Total U.S. Imports

Oil ImportsNon-Oil Imports

Industrial Suppl.GoldOther FuelsOther Ind. Suppl.

Capital GoodsAircraft & PartsComputers & PartsOther Machinery

Automotive ProductsFrom CanadaFrom Other

Consumer GoodsFoodsAll Other

489.4 478.9 497.3 505.6 501.2 520.5 41.6 19.4

51.2 51.7 52.5 48.8438.2 427.1 444.8 456.8

83.92.93.9

77.1

120.711.726.182.9

84.928.856.2

108.026.514.1

80.43.03.9

73.5

120.412.225.882.4

79.128.151.0

101.627.618.0

80.02.33.8

73.9

121.312.527.181.7

90.833.157.7

109.926.316.5

83.33.14.875.4

122.111.526.883.8

88.630.158.5

118.726.417.7

41.4 48.7459.8 471.8

84.42.24.4

77.8

125.212.127.785.4

87.830.956.9

116.326.819.2

87.53.04.480.1

129.813.330.086.5

90.131.159.0

117.828.118.5

-3.0 7.344.7 12.1

7.10.00.56.6

9.51.14.24.1

11.03.08.0

16.20.50.4

3.10.80.02.3

4.61.22.31.1

2.30.12.1

1.51.3

-0.8

e--Average of first 2 months of quarter at an annual rate.Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Page 83: Fomc 19920818 g Bpt 219920813

IV-3

Exports to Western Europe and Japan edged down in April-May as

economic activity in such key markets as the United Kingdom,

Germany, and Japan turned down in the second quarter. Shipments to

developing countries in both Asia and Latin America flattened out.

Exports to Canada and Mexico continued to move up, supported in

large part by automotive shipments. By trade category, the largest

decline was in exported civilian aircraft which decreased from a

very strong first-quarter level; deliveries of aircraft have been

particularly volatile in recent months. The remaining decline in

exports in April-May was in industrial supplies (coal, metals,

building materials) and agricultural products (particularly wheat

and corn). Other categories of exports recorded increases,

especially automotive products, computers, and chemicals.

Non-oil imports were 2.5 percent higher in April-May than the

first-quarter average, with the increase spread among all major

trade categories. From the fourth quarter of last year through

April-May, the quantity of non-oil imports expanded at a 6 percent

annual rate. Imported computers and semiconductors accounted for

two-thirds of the overall rise. The quantity of other non-oil

imports increased at a 2-1/2 percent annual rate over the same

period. The categories that grew most were household appliances,

apparel, passenger cars, civilian aircraft, industrial machinery,

metals, paper, and fruits and vegetables.

An 18 percent increase in the value of oil imports in April-May

was split between increased quantity and higher prices. A normal

seasonal switch to stockbuilding pushed up the quantity of oil

imports in April-May. Imports in the first quarter had been

restrained by mild weather and stock drawdowns. Preliminary

Department of Energy data suggests that imports in June fell

slightly from the April-May rate; preliminary figures also suggest a

Page 84: Fomc 19920818 g Bpt 219920813

IV-4

rebound of consumption in July which could push imports well above 8

mb/d.

In May, oil import prices continued to respond to OPEC

production restraint, especially on the part of Saudi Arabia, which

had begun to push spot prices up in March. Spot prices of West

OIL IMPORTS(BOP basis, adjusted 1/ annual rates)

1991 1992 MonthsQ4 Q1 A/M Feb Mar Apr May

Value (Bil. $) 48.78 41.42 48.72 39.76 40.92 47.83 49.60Price ($/BBL) 18.05 15.28 16.78 15.18 15.18 16.16 17.39Quantity (mb/d) 7.40 7.42 7.96 7.17 7.38 8.11 7.81

1/ Oil imports are not seasonally adjusted: they are adjusted only forthe number of days in the month.Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Texas Intermediate crude (WTI) continued to rise through late June,

before holding steady at approximately $22.00 per barrel throughout

July. More recently, spot prices have eased somewhat with the

unwinding of tensions over U.N. surveillance of Iraq; spot WTI

currently stands at slightly above $21.00 per barrel. This pattern

of spot prices suggests that import prices will likely rise through

July, to roughly $19.50 per barrel.

Prices of Exports and Non-oil Imports

Prices of U.S. exports rose 0.1 percent in June bringing the

increase for the second quarter to 1.6 percent at an annual rate

(BLS prices). This increase contrasts with a decline of similar

magnitude in the first quarter. The increase in the second quarter

was attributable primarily to higher prices of exported industrial

supplies (especially fuels and building materials), with smaller

increases recorded for consumer goods and automotive products.

Prices of agricultural exports (notably wheat and corn) declined in

the second quarter.

Page 85: Fomc 19920818 g Bpt 219920813

IV-5

EXPORT AND IMPORT PRICE MEASURES(percent change from previous period, annual rate)

Year Quarters Months1992-Q2 1991 1992 19921991-Q2 Q4 Q1 - Q2 May Jun

(Quarterly Average, AR) (Monthly Rates)

-------------------- BLS Prices-------------------

Exports. Total 0.0 2.5 -1.4 1.6 0.3 0.1Foods, Feeds, Bev. 1.7 17.6 -1.3 -2.1 -0.1 0.2Industrial Supplies -3.2 -3.0 -6.5 5.3 0.8 -0.2Capital Goods 1.1 2.2 0.7 -0.1 0.1 0.3Automotive Products 2.0 3.0 1.6 1.0 0.0 0.1Consumer Goods 1.9 2.5 5.9 1.6 0.6 -0.3

Memo:Agricultural -0.7 10.8 -3.3 -1.0 0.2 0.6Nonagricultural 0.0 1.2 -1.3 2.1 0.3 0.0

Imports. Total 0.4 5.2 -1.2 1.1 0.6 1.1Foods, Feeds, Bev. -1.7 3.7 10.0 -15.1 -2.5 0.3Industrial Supplies -1.9 3.1 -15.1 13.4 2.5 2.4

Ind Supp Ex Oil* -2.0 -4.3 4.7 -0.7 0.0 0.2Capital Goods 0.7 6.5 4.7 -3.6 -0.1 0.7Automotive Products 1.1 7.4 0.9 -2.6 -0.3 0.7Consumer Goods 2.7 5.1 6.2 0.4 0.3 0.4

Memo:Oil -1.8 19.5 -45.0 50.3 7.7 6.6Non-oil 0.6 3.9 4.4 -2.7 -0.2 0.5

------------- Prices in the NIPA Accounts----------

Fixed-WeightExports, Total -0.1 2.2 -0.7 0.7

Ag -1.5 10.4 -4.1 -2.5Nonag 0.1 1.1 -0.4 1.1 -

Imports, Total 1.5 4.1 -4.2 9.0Oil -0.7 20.1 -48.9 60.3Non-oil 1.8 2.2 1.8 5.4

DeflatorsExports, Total -1.2 1.1 -1.1 -1.8

Ag -2.2 4.6 -5.2 -1.5Nonag -1.1 0.6 -0.7 -1.8

Imports, Total -1.4 2.3 -6.9 3.8Oil -0.6 20.4 -48.6 59.1Non-oil -1.6 0.2 -1.5 -0.2

*/ Months for this series are not for publication.

Page 86: Fomc 19920818 g Bpt 219920813

IV-6

An increase in prices of non-oil imports in June slowed the

decline in prices for the second quarter on average to 2.7 percent

at an annual rate. The downward swing in prices in the second

quarter, after two quarterly increases, reflected, in part, a lagged

adjustment to the rise in the exchange value of the dollar during

the first quarter of this year. While the largest declines were

registered in foods, significant decreases were also reported for

imported capital goods, passenger cars, and recreational and home

entertainment equipment.

U.S. International Financial Transactions

Capital transactions thus far recorded for the second quarter

register large inflows, especially through foreign private purchases

of U.S. Treasury securities and increases in foreign official

reserves in the United States. (See lines 1-5 of the Summary Table

of U.S. International Transactions.) Data for direct investment and

certain other capital flows are not yet available, but for those

categories that are available recorded net inflows totaled almost

$30 billion in the second quarter, compared with $20 billion in the

first quarter. This increase in net capital inflows more than

offsets our projected deterioration in the current account,

suggesting that the large negative statistical discrepancy recorded

in the first quarter was likely not reversed in the second.

Foreign official reserves in the United States rose rapidly in

May and June

For the second quarter

as a whole, official reserves in the United States increased $21

billion (line 4). Most of the increase was attributable to non-G-10

Page 87: Fomc 19920818 g Bpt 219920813

IV-7

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS

(Billions of dollars)

1990 1991 1991 1992 1992

Year Year Q.3 _ 01 02 Apr May June

Private Capital

Banks

1. Change in net foreign 1positions of banking offices

in the U.S. (+ - inflow)

Securities

2. Private securities2

transactions, net

a) foreign net purchases3

(+) of U.S. corporate bonds

b) foreign net purchases

(+) of U.S. corporate stocks

c) U.S. net purchases (-) of

foreign securities

3. Foreign net purchases (+) of U.S.

Treasury obligations

Official Capital

4. Changes in foreign official

reserves assets in U.S.

(+ - increase)

a) By area

G-10 countries

OPEC

All other countries

b) By type

U.S. Treasury securities4

Other

5. Changes in U.S. official reserve

assets (+ - decrease)

5Other transactions (Quarterly data)

6. U.S. direct investment (-) abroad

7. Foreign direct investment (+) in U.S.6

8. Other capital flows (+ - inflow)

9, U.S. current account balance

10. Statistical discrepancy

36.6 -19 2 111 -2.0 3.9 -5.5 0.3 3.7 -9.5

-29.1 -11.4 -2.5 -6.7 -4.3 2.3 -_.2 0.2 2.3

16.2 25.7 8.2 6.5 7.7 11.9 4.1 3.7 4.1

-13.7 10.1 2.3 -1.5 -2.8 -0.8 -0.3 0.1 -0.5

-31.6 -47.3 -13.0 -11.8 -9.2 -8.8 -4,0 -3.6 -1.3

.0 1 .8 -0.7 10.4 5.1 -5.1 10.5

1 16.0 4 133 21.1 20.6

10.0 -17.6

1.2 -5.8

20.8 39.3

4.0 9.0 7.6

-1.9 0.5 2.4 3.3 -1.5 2.8 2.0

-4.4 1.2 2.8 -2.6 -0.3 -3.1 0.99.8 11.5 15.9 19.8 5.8 9.3 4.7

29.6 14.8 5.6 12.6 14.9 11.6 2.6 5.6 3.42.5 1.1 -2.2 0.7 6.2 9.0 1.4 3.4 4.1

-2 . 3.9 1_2 -1.1 1.8 -0.2 2_0 *

-32.7

45.1

-5.8

-90.4

47.4

-27.1

11.5

11.4

-3.7

-1.1

-7.1

*

5.0

-11.1

-1.5

-11.7

5.7

3.5

-7.2

2.4

-11.3

0.7

12.7

-5.3

-15.7

n.a.

n.a.

n.a.

n.a.

n.a.

MEMO:

U.S. merchandise trade balance -- part

of line 9 (Balance of payments basis,

seasonally adjusted) -108.9 -73.4 -20.2 -18.5 -17.5 n.a. n.a. n.a. n.a.

1. Includes changes in positions of all depository institutions, bank-holding companies, and certain transactionsbetween brokers/dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements.)

2. These data have not been adjusted to exclude commissions on securities transactions and, therefore, do not match

exactly the data on U.S. international transactions as published by the Department of Commerce.3. Includes all U.S. bonds other than Treasury obligations.

4. Includes deposits in banks, commercial paper, acceptances, borrowing under repurchase agreements, and other securities.

5. Seasonally adjusted.

6. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking and

official transactions not shown elsewhere. In addition, it includes amounts resulting from adjustments to the data made bythe Department of Commerce and revisions to the data in lines 1 through 5 since publication of the quarterly data in theSurvey of Current Business.*--Less than $50 million.

NOTE: Details may not add to total because of rounding.

Page 88: Fomc 19920818 g Bpt 219920813

IV-8

countries, primarily Spain and Taiwan, and to the BIS. Argentina

and Chile also recorded noticeable increases. Thailand's reserves

in the United States rode the wake of this spring's political unrest

by rising $3-3/4 billion in May and falling $2-1/4 billion in June.

Partial data for July from the FRBNY indicate further large inflows

of official capital.

Private foreign net purchases of U.S. corporate and agency

bonds remained brisk in May and June and totaled $12 billion for the

second quarter (see line 2a), as U.S. corporations continued to

issue debt at a record-setting pace. Foreigners resumed selling

U.S. equities on a modest scale in June, bringing the total sales

for the quarter to $3/4 billion (line 2b). Japanese residents made

small net purchases of U.S. equities in June, their first monthly

net purchases since last November.

Private foreigners' net purchases of Treasury securities were

large but erratic during the second quarter. Purchases of $5

billion in April were offset by equally large sales in May (line 3).

In June purchases totaled more than $10 billion. The sales in May

were concentrated in the United Kingdom while the purchases in June

were primarily by Japan, the World Bank, and offshore financial

centers.

U.S. residents continued to purchase foreign securities on a

large scale in May and June, bringing the total for the second

quarter to $9 billion (line 2c). Unlike earlier in the year when

net purchases were evenly split between bonds and equities, the bulk

of the purchases in May and June were in foreign bonds, coinciding

with exceptionally large issuance of Yankee bonds.

Banks in the United States, especially Japanese-based banks,

continued to rely on their own foreign offices for funds in the

Page 89: Fomc 19920818 g Bpt 219920813

INTERNATIONAL BANKING DATA

(Billions of dollars)

1990 1991 1992

Mar. June Sept. Dec. Mar, June Sept. Dec. Mar. June July !/

1. Net Claims of U.S. Banking

Offices (excluding IBFS) on Own

Foreign Offices and IBFS -11.7 -11.0 -15,6 -31.3 -23.8 -13.7 -14,1 -35.8 -41.4 -56.8 -55,0

(a) U.S.-chartered banks 12.2 7.2 5.7 5.5 7.6 5.4 11.0 12.4 3.2 8.3 9.4

(b) Foreign-chartered banks -23.9 -18.2 -21,3 -36.9 -31.3 -19.2 -25.2 -48.3 -44.6 -65.0 -64.4

2. Credit Extended to U.S.

Nonbank Residents by Foreign

Branches of U.S. Banks 21.8 22.2 24.0 24.7 26.0 23.9 23.7 23.9 23.3 24.5 25.0

3. Eurodollar Holdings of

U.S. Nonbank Residents 1/ 110.6 106,5 109.1 116.1 114.6 105.8 100.8 102.9 100.3 90.0 88.4

1. Includes term and overnight Eurodollars held by money market mutual funds. Note: These data differ in coverage and timing from

the overall banking data incorporated in the international transactions accounts, Line 1 is an average of daily data reported to

the Federal Reserve by U.S. banking offices. Line 2 is an average of daily data. Line 3 is an average of daily data for the

overnight component and an average of Wednesday data for the term component.

*/ Includes data through only July 27.

Page 90: Fomc 19920818 g Bpt 219920813

IV-10

second quarter. On a monthly average basis, net claims on own

foreign offices and IBFs decreased by $15 billion between March and

June. (See line 1 of the table of International Banking Data.)

Partial data for July indicate only a slight increase in net claims.

This pattern is distorted in the month-end data reported in line 1

of the Summary Table due to an extraordinary increase in net claims

on the last day of June that was then reversed early in July.

Foreign Exchange Markets

The weighted-average foreign-exchange value of the dollar, in

terms of the other G-10 currencies, has declined about 2-1/2 percent

on balance since June 30, the first day of the last FOMC meeting, as

shown in the top panel of the accompanying chart. On July 2, the

day after the FOMC meeting, the dollar declined in response to weak

U.S. June employment data and the subsequent 1/2 percentage point

reduction in the U.S. discount and federal funds rates. Later, the

dollar moved lower following the German discount rate hike and

unfavorable U.S. trade data for May. The dollar reached a low on

July 20 of DM 1.4470, just above the all-time low of DM 1.4430.

The dollar

later moved above DM 1.50 on tensions between Iraq and the United

Nations, but moved back when those tensions abated. Following U.S.

July employment data that showed less improvement than some had

expected, the dollar moved below DM 1.47 on August 7. and the Desk

intervened again.

. In total, the Desk has

purchased $770 million against marks.

Page 91: Fomc 19920818 g Bpt 219920813

IV-11

As shown in the bottom panel, the dollar has declined about 4

percent on net against the mark since June 30, as German interest

rates firmed slightly while U.S. rates declined. The Bundesbank

raised its discount rate 3/4 percentage point on July 16, to 8-3/4

percent, while leaving the Lombard rate unchanged at 9-3/4 percent.

By reducing the amount of subsidy that German banks receive from

being able to borrow up to a given quota at the below-market

discount rate, the Bundesbank's move was expected to reduce bank

profits and possibly slow the pace of credit expansion. The move

should not by itself have had any direct effect on German money

market rates, because it did not change the marginal cost of funds

to banks. However, perhaps because the action was seen as raising

the likelihood of an eventual increase in the Lombard rate, the mark

strengthened against other EMS currencies, prompting moderate

interest rate hikes by several other European central banks. The

Netherlands Bank raised its rate on special advances twice, by a

total of 30 basis points, to 9.60 percent. The Belgian advances

rate was increased 15 basis points to 9.45 percent. The Italian

discount rate was raised from 13 percent to 13-3/4 percent, but

later was lowered to 13-1/4 percent following an agreement between

the government and labor unions to end Italy's system of automatic

wage indexation.

Subsequent to the German

Page 92: Fomc 19920818 g Bpt 219920813

IV-12

WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLARMarcn 1973 = 100

Daily iFOMC

July 1

May June July August

SELECTED DOLLAR EXCHANGE RATES

Daily IFOMC

July 1

May 1 = 100

German Mark

Japanese Yen- /NIh

August

Page 93: Fomc 19920818 g Bpt 219920813

IV-13

discount rate hike, rates on the Bundesbank's repurchase tenders

were nudged up 5 basis points. The upward trend in interest rates

weighed on European stock prices; price indexes declined about 11

percent in the United Kingdom, Germany, and Italy, and about 7

percent in France.

The dollar has gained about 1 percent against the Japanese yen

since the last FOMC meeting. Following Japanese parliamentary

elections, the Bank of Japan responded to further signs of economic

weakness by lowering its official discount rate 1/2 percentage point

to 3-1/4 percent, with the overnight call money rate allowed to

decline by a similar amount. The Bank of Japan attempted to

mitigate the yen's decline by selling dollars against yen. The

Nikkei stock price index fell to new six-year lows despite the rate

cut. On balance, the Nikkei index is about 7 percent lower over the

intermeeting period.

Developments in Foreign Industrial Countries

Activity in most major foreign industrial countries appears to

have slowed in recent months. In Japan, evidence from the second

quarter, including further softening of labor market conditions in

June, points to deceleration of activity and demand. Recent west

German indicators (such as retail sales, orders, and another

increase in the unemployment rate in July) suggest that underlying

growth has weakened, and real GDP is estimated to have fallen about

3 percent (s.a.a.r.) in the second quarter following its unusually

strong first-quarter performance. France and Italy have shown signs

of modest growth, but the United Kingdom appears to have remained in

recession in the second quarter. The Canadian recovery recently has

been confined largely to the external sector where exports have been

strong; the unemployment rate (s.a.) stayed above 11-1/2 percent in

Page 94: Fomc 19920818 g Bpt 219920813

IV-14

July, and other indicators suggest that domestic demand and activity

have been soft.

Measured rates of year-over-year inflation have continued to

edge down in many countries, although in some cases the reduction is

attributable to special factors. Other evidence, however, including

deceleration of wages, suggests that underlying inflationary

pressure has lessened.

Several countries recorded wider current account deficits in

June, contrary to the general narrowing trend this year in countries

in deficit. In Japan, the current account surplus (s.a.) has

continued to expand to an annual rate nearing $115 billion.

Individual country notes. In Japan, recent economic indicators

point to further weakening in the pace of economic activity.

Industrial production (s.a.) increased 2.1 percent in June, but this

mainly represented recovery from the 1.9 percent decline of the

previous month when a number of plants were temporarily closed for

inspections. For the second quarter as a whole, industrial

production was 2.4 percent below its first-quarter level. The

inventory-to-shipments ratio (s.a.) declined 2.3 percent in June,

but remained nearly 18 percent above its low point of October 1990.

The capacity utilization rate (s.a.) declined an additional 1.4

percent in May, falling 11.8 percent below its October 1990 peak.

The value of retail sales showed a 12-month decline of 4.4 percent

in June. Construction orders fell 15.4 percent from a year earlier

in June, and new machinery orders (s.a.) fell 13.1 percent in May.

New passenger car registrations (s.a.) increased 7.3 percent in

June, but this only partially reversed a sharp decline in the

previous month; for the second quarter as a whole, new car

registrations were down 6.7 percent from the first quarter. Housing

Page 95: Fomc 19920818 g Bpt 219920813

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES(Percentage change from previous period, seasonally adjusted) 1

Q4/Q4 Q4/Q41990 1991

1991 1992 1992------------------ -------- Latest 3 months

Q3 Q4 Q1 02 Feb. Mar. Apr. May June from year ago 2

Canada

GDPIP

France

GDPIP

West Germany

GNPIP

Italy

GDPIP

Japan

GNPIP

United Kingdom

GDPIP

United States

GNPIP

-2.0 -.0-6.3 -1.4

1.5 1.7-. 3 1.9

.1 .0 .4 n.a.

.7 -1.1 -.5 n.a,

1.1 .1 1.0 n.a..6 -.2 .1 n.a.

5.3 .9 -.4 -.5 1.8 n.a.5.4 .3 -.5 -1.2 2.8 -2.2

1.6 1.8-3.8 -. 5

4.7 3.26.9 -1.6

-. 7 -1.7-3.1 -. 8

-. 5 .1.3 -. 5

.3 .4 .6 n.a.-.3 1.1 2.5 n.a.

.5 -.0 1.0 n.a.

.1 -1.2 -3.1 -2.4

.2 -.4 -.4 n.a.1.0 -. 1 -.8 -.2

.3 .1 .7 .31.6 -.2 -.7 1.1

.4 .5 .2 -. 7 n.a.

-.8 -.3 1.4 -1.6 n.a.

1.2 -1.8 -.7 -. 1 -2.1

2.3 -.3 -5.5 4.2 n.a.

-.5 -2.6 .1 -1.9 2.1

1.1 -.7 .5 -.9 .2

.5 .4 .5 .5 -.3

1. Asterisk indicates that monthly data are not available.2. For quarterly data, latest quarter from year ago.

1.9.1

2.71.2

.8-1.1

2.2-6.4

-1.5-. 2

1.51.8

I

--

Page 96: Fomc 19920818 g Bpt 219920813

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES(Percentage change from previous period) 1

Q4/Q4 Q4/Q41990 1991

1992 1992------------------------- -- ------- --------------------------- Latest 3 months

Q1 Q2 Q3 Q4 Q1 Q2 Apr. May June July from year ago

Canada

CPIWPI

France

CPIWPI

West Germany

CPIWPI

Italy

CPIWPI

Japan

CPIWPI

United Kingdom

CPIWPI

United States

CPI (SA)WPI (SA)

4.9 4.11.9 -3.2

3.6 2.9.7 -3.6

3.0 3.9.9 1.6

6.3 6.19.9 1.1

3.2 3.21.9 -1.3

10.0 4.25.9 4.9

6.3 3.06.4 -.1

2.9-. 3

.5-. 5

.7-1.6

.7-1.5

.6 -. 1-. 9 -. 4

.9-1.0

.8 .9 1.5

.5 .3 .7

.4 .5

.5 .6

.7n.a.

.7 1.2

.2 .4

1.9 1.4 1.0 1.7 1.4 1.2.2 -1.0 .5 1.4 .0 n.a.

.8 .8

.1 -. 4

.6 2.11.8 1.9

.4 1.1 -. 3 1.3-. 4 -. 7 -. 4 .0

1.0 .5 2.2.5 1.4 1.1

.7 .9 .7 .8

.0 .5 .0 .6

.2 .2 n.a.

.6 .0 n.a.

.2 .3 .1 n.a.K X

.3 .4 .2

.3 .0 -. 1

.4 .5 .3

.8 .2 n.a.

.0n.a.

.2n.a.

.0 -. 4-. 2 n.a.

.4 .0 n.a.

.1 .0 .1

.2 .1 .3 .1

.1 .4 .2 .1

indicates that monthly data are not available.

1.4-. 3

3.1-3.1

2.3-1.4

4.23.5

3.11.5

1. A-terisk

Page 97: Fomc 19920818 g Bpt 219920813

TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)

1990 19911991 1992

------- ------

Q1 Q2 Q3 Q4 Q1 Q2

1992

Apr. May June July

Canada

TradeCurrent account

France

TradeCurrent account

Germany 2

Trade (NSA)Current Account

Italy

TradeCurrent account

Japan

TradeCurrent account

United Kingdom

TradeCurrent account

United States

TradeCurrent account

(NSA)

(NSA)

9.4 5.0-18.9 -25.5

-9.3 -5.5-9.5 n.a.

65.2 12.946.4 -19.5

-12.2 -13.0-14.4 -21.5

51.8 78.835.8 72.6

-32.6 -18.0-26.8 -8.2

-108.9 -73.4-90.4 -3.7

1.5 1 .7-5.6 -6.0

-2.7 -1.5 -1.5-4.0 -1.6 -. 2

,9 1.0 1.7-6.6 -7.3 -5.9

.3n.a.

n.a.n.a.

.5 1.0X X

.9 2.0n.a. n.a.

4.4 -1.1 2.8 6.7 4.4 3.4-5.6 -5.8 -5.8 -2.2 -5.6 -6.4

-1.3 -3.6 -4.8 -3.3 -2.0 -4.0-8.1 -4.6 -3.7 -5.0 n.a. n.a.

17.4 18.8 20.8 21.9 28.0 24.512.8 18.7 19.6 21.5 28.5 28.6

-5.8 -3.8 -4.0 -4.5 -5.4 -5.6-4.4 -.5 -2.1 -1.1 -3.8 -4.5

-18.3 -16.4 -20.2 -18.5 -17.5 n.a.12.2 2.4 -11.1 -7.2 -5.3 n.a.

1.4-1.2

n.a. n.a.X X

.8 -. 2 n.a.n X X

.7-2.5

1.3 n.a.-2.7 n.a,

-1.2 -1.4 -1.5X N X

n.a.N

6.9 9.7 7.9 8.59.3 10.9 8.41 n.a.

-2.4 -1.5 -1.7 n.a,-2.0 -1.1 -1.3 n.a.

-8.1 -8.6 n.a.X X X

n. a.X

1. The current account includes goods, services, and privatethat monthly data are not available.2. Before July 1990, West Germany only.

and official transfers. Asterisk indicates

Page 98: Fomc 19920818 g Bpt 219920813

IV-18

starts (s.a.), which had increased strongly earlier in the year.

have leveled off recently, edging down 0.3 percent in June and

showing only a 0.9 percent increase during the second quarter. The

unemployment rate (s.a.) remained steady at 2.1 percent in June, but

the job-offers-to-applicants ratio (s.a.) dropped 5-1/4 percent to

1.08.

Price pressures have continued to ease on balance. Tokyo

consumer prices (n.s.a.) declined 0.4 percent in July and were 2

percent above their level twelve months earlier. Wholesale prices

(n.s.a.) were down 0.2 percent in June and showed a 12-month decline

of 1.5 percent, reflecting in large part a 7.4 percent reduction in

import prices over this period.

The trade surplus (customs basis, s.a.) expanded somewhat in

July, and for the first seven months of the year was in surplus by

almost $105 billion (a.r.); the current account surplus (s.a.a.r.)

in the first half of the year was nearly $115 billion.

Real GDP in western Germany is estimated to have fallen in the

second quarter about 3 percent (s.a.a.r.) following very robust

growth in the first quarter that was due in large part to strength

in construction activity encouraged by mild weather. West German

industrial production (s.a.) fell 2.1 percent in June after

declining 0.7 percent in the previous two months, and the average

level of industrial production in the second quarter was 2.2 percent

below its first-quarter level. The volume of new orders for west

German manufactured goods (s.a.) also fell (1.8 percent) in June for

the fourth consecutive month, as domestic orders (including orders

from eastern Germany) tumbled 3 percent.

The west German unemployment rate has increased 0.1 percentage

point in each of the past five months and in July stood at 6.7

percent. Although unemployment has risen, the number of jobs in

Page 99: Fomc 19920818 g Bpt 219920813

IV-19

western Germany has been expanding slowly. Capacity utilization in

June was 0.7 percentage point below its level in March, and, at 85

percent, was 5-1/2 percentage points below its December 1990 peak.

Industrial production in eastern Germany (n.s.a.) fell 8

percent in April, but on a year-over-year basis continued its upward

trend and recorded a 12-month growth rate of 3 percent.

Consumer-price inflation in western Germany has moderated

somewhat in recent months. Consumer prices (n.s.a.) were unchanged

in July after advancing 0.2 and 0.4 percent in the previous two

months. On a year-over-year basis, consumer prices were up 3.3

percent in July, compared with 4.3 percent in June. Most of this

decline reflects elimination of the impact of excise tax increases

introduced in July 1991 on year-over-year measures of CPI inflation.

The pan-German current account deficit widened in the second quarter

to more than $25 billion (a.r.) primarily because of slower exports.

Through June, M3 (s.a.) in western and eastern Germany had

increased at a revised annual rate of 8.7 percent in 1992 relative

to the fourth quarter of 1991. Although the June increase was below

growth rates near 9-1/2 percent registered earlier in the year.

June's figure was still well above the Bundesbank's target range of

3-1/2 to 5-1/2 percent growth for 1992. Demand on the asset side of

banks' balance sheets remains strong, and the supply of funds to the

banking sector has shifted toward shorter maturities in reaction to

Germany's inverted yield curve. In response to rapid money growth

and concerns about inflation, the Bundesbank raised its discount

rate by 3/4 percentage point on July 16, but did not alter its

Lombard rate.

In recent weeks, the German government has shown a renewed

sense of urgency regarding progress towards fiscal consolidation,

preferably without tax increases. On July 1, the Cabinet approved a

Page 100: Fomc 19920818 g Bpt 219920813

IV-20

proposed 1993 Federal budget and medium-term financial plan that

would restrict the annual growth of nominal expenditures to 2.5

percent during the next four years.

In France, monthly indicators suggest that GDP growth slowed in

the second quarter from the rapid 4 percent pace (s.a.a.r.)

registered in the first quarter. Industrial production (s.a.) fell

1.6 percent in May, negating a 1.4 percent increase in April.

However, much of the drop was due to a fall in energy production;

manufacturing output declined only 0.4 percent, following a rise of

0.3 percent in the previous month. The latest monthly business

survey by the Bank of France indicates that industrial production

rose slightly in June and foreign orders remained strong, but retail

sales contracted.

Consumer prices rose 3 percent in June from their year-earlier

level, down slightly from the 3.1 percent rate registered in both

April and May. This favorable inflation performance was supported

by further deceleration of wages. Hourly wages in the June survey

were only 3.1 percent above their year-earlier level, down

significantly from the 4.3 percent increase recorded in April.

France registered a monthly trade deficit of $180 million

(s.a.) in June, the first this year, as imports surged 8 percent

from their level in May while exports rose only 3 percent. The

increase in imports was attributed to a rise in imported investment

goods, which constitute roughly one-third of total imports. Over

the first half of this year the trade surplus was $2.9 billion,

compared with a deficit of $4.3 billion during the same period in

1991; exports rose 6.3 percent, and imports declined slightly over

this period.

Page 101: Fomc 19920818 g Bpt 219920813

IV-21

The government has announced that a referendum on the

Maastricht Treaty will be held on September 20; polls continue to

show a majority in favor of the treaty.

In Italy, the economy continues to grow at a modest pace after

recording real GDP growth of 2.4 percent (s.a.a.r.) in the first

quarter (up from 1.8 percent in the previous quarter). Industrial

production (s.a.) rose 4.2 percent in May after a sharp decline in

April; the average for the two months was down 3.1 percent from the

first-quarter level. Auto sales were up 10.4 percent in the second

quarter from the same period a year earlier, but most of the gain

went to imports; sales by Italian auto manufacturers rose only 5

percent.

Inflation has eased recently. Consumer prices (n.s.a.)

increased only 0.2 percent in July, while the 12-month rise remained

at 5.4 percent, down from about 6 percent at the beginning of the

year. Wholesale prices (n.s.a.) in May were 3 percent above a year

earlier, the same as in April. The cumulative trade deficit during

the first six months of 1992 was $11 billion (s.a.a.r.), up from

$9.7 billion in the same period in 1991.

The new government of Prime Minister Giuliano Amato that took

office in early July has moved swiftly to try to gain control of

Italy's burgeoning budget deficit. Downward pressure on the lira

within the EMS that led the Bank of Italy to raise its discount rate

twice during July (partly reversed by a cut in early August) was an

important factor pushing the government to act. A supplementary

budget package that contains various one-time tax increases and a

freeze on public-sector wages was approved by the Italian parliament

in early August. A number of government-owned firms have been

converted to joint-stock companies in preparation for partial

privatization, a step that the government intends to carry out

Page 102: Fomc 19920818 g Bpt 219920813

IV-22

before the end of the year. Longer-term budget reforms reportedly

are being considered for the 1993 budget proposal, which will be

made public in September. Also, in August the government signed a

key accord with trade unions and employers that will reform the

process of wage negotiation.

Recent data shed doubt on whether economic recovery has begun

in the United Kingdom. Total industrial production (s.a.) rose 0.2

percent in June after contracting 0.9 percent in the previous month;

however, the second-quarter average was down 0.2 percent from the

first-quarter level and from the level a year ago. Manufacturing

production also rose 0.2 percent in June, but the second-quarter

average level was only 0.4 percent above the first quarter. After

recovering strongly in the first five months of the year, consumer

confidence fell in June and July. Retail sales volume turned down

in June, leaving the second-quarter average 0.5 percent above the

average first-quarter level. Business confidence, which had been

recovering, also deteriorated in June and July. The unemployment

rate (s.a.) rose in July to 9.7 percent.

Retail prices were steady in June and stood 3.9 percent above

their year-earlier level. Excluding mortgage interest rates,

consumer prices edged up to a level 4.8 percent above their level of

June 1991. Producers' output prices increased only 0.1 percent in

July to a level 3.4 percent above a year ago. Underlying wage

inflation fell to an annual rate of 6-1/4 percent in June, and

recent pay settlements (a more forward looking indicator of wage

inflation) are in the neighborhood of 4-1/4 percent.

In June, the trade deficit widened to $1.7 billion bringing the

cumulative deficit to $23 billion (s.a.a.r.) for the first half of

1992 compared with a deficit of $19 billion in the previous half-

year. The current account deficit (s.a.) deteriorated from $5.7

Page 103: Fomc 19920818 g Bpt 219920813

IV-23

billion in the second half of 1991 to $16.7 billion in the first

half of this year.

In Canada, available second-quarter data on economic activity

suggest a tepid but ongoing recovery. Industrial production (s.a.)

for April and May, taken together, was 0.3 percent above its first-

quarter average. Second-quarter housing starts (s.a.) increased 9

percent. However, many May indicators suggested continued

sluggishness, as real GDP at factor cost (s.a.) slipped 0.1 percent,

retail sales (s.a.) fell 0.7 percent, factory shipments (s.a.) were

off 0.5 percent, and new orders (s.a.) dropped 2.4 percent, after

April increases in all four series. In June, motor vehicle sales

(s.a.) were virtually unchanged for the fourth straight month. In

addition, in July the unemployment rate (s.a.) was unchanged from

its eight-year high of 11.6 percent.

The CPI, excluding food and energy (n.s.a.), was unchanged in

June, lowering twelve-month inflation from 2 percent to 1.9 percent.

The all-items CPI increased only 1.1 percent over this period.

Wholesale prices (n.s.a.) were unchanged in June and stood 0.2

percent higher than a year earlier. The annual rate of increase in

wages engendered by May collective bargaining agreements was 1.3

percent (a.r.), the lowest in more than 20 years.

Canada's current account deficit (s.a.a.r.) decreased $5.5

billion in the first quarter to $23.8 billion, as merchandise

exports rose briskly. The merchandise trade surplus (s.a.a.r.) for

April and May, taken together, was $9.2 billion, above its first-

quarter level of $6.8 billion.

Quebec and the English-speaking provinces will hold formal

constitutional negotiations on August 20, the first since 1990.

Should these talks fail to produce an agreement, Quebec premier

Page 104: Fomc 19920818 g Bpt 219920813

IV-24

Robert Bourassa has promised to hold a referendum on the province's

political future by October 26, 1992.

Developments in East European Countries and Russia

In Poland, Hanna Suchocka was appointed prime minister in mid-

July, following unsuccessful attempts by her predecessor to form a

government. Despite domestic political turmoil, the real economy

has performed surprisingly well so far in 1992, with increased

industrial sales, moderating inflation, rising exports, and

increased international reserves. The new finance minister has

confirmed the government's intention to keep the budget deficit to 5

percent of GDP this year, as previously agreed with the IMF.

However, the budgetary situation remains highly uncertain. The IMF

is currently conducting negotiations with the new government on a

15-month stand-by arrangement that could be implemented later this

year.

In late July, Czech and Slovak leaders publicly confirmed that

the federation would break up; the dissolution had been widely

expected following the Slovak nationalist election victory in June.

While the leaders claimed agreement had been reached on several

basic principles of coexistence following the split, including a

customs union and a free trade zone, details remain vague.

Furthermore, the leaders acknowledged that agreement on common

budgetary, fiscal, and monetary policies was more difficult.

On August 5, the IMF Executive Board approved a $1 billion

first-credit-tranche stand-by arrangement for Russia. This program

represents a more modest level of initial IMF lending to Russia than

earlier expectations of an upper-credit-tranche program. As a

condition for approval of this arrangement, the Russian government

has agreed to implement a policy program that will limit further

macroeconomic deterioration.

Page 105: Fomc 19920818 g Bpt 219920813

IV-25

In the first half of the year, industrial output fell 13.5

percent. Although the rate of inflation has declined after a 250

percent jump in January following price liberalization, it was still

high in June at 25 percent (monthly rate). From January through

June, the government deficit amounted to 8.1 percent of GDP,

considerably higher than projected. Russia has agreed to adopt

measures to reduce the fiscal deficit, tighten monetary policy.

settle growing inter-enterprise arrears, and rationalize relations

with other republics of the former Soviet Union that use the ruble

as their currency.

On July 16, the Chairman of the Central Bank of Russia, Georgy

Matyukhin, resigned, and former Soviet Gosbank Chairman, Viktor

Geraschenko, was named acting head of the central bank. After he

publicly criticized the central bank's intervention policy to

support the ruble, the ruble depreciated at the weekly currency

auctions, but more recently its value has steadied. The central

bank also has announced that subsidized credits will be provided to

selected industrial firms, but under the program agreed with the IMF

the amount is to be sharply limited.

Economic Situation in Other Countries

In Mexico, the current account deficit widened in the first

quarter and private capital inflows have slowed in recent months. On

August 12, President Bush announced that the North American Free

Trade Agreement (NAFTA) negotiations have been completed. However,

ratification cannot occur before 1993. Brazil reached preliminary

agreement on a Brady-style debt restructuring package with creditor

banks July 9, but in light of political turmoil and Brazil's non-

compliance with the fiscal performance criteria of its IMF stand-by

arrangement, it is not clear when the agreement will be implemented.

In Argentina, economic activity has been booming, inflation remains

Page 106: Fomc 19920818 g Bpt 219920813

IV-26

relatively low, and performance under the IMF stand-by arrangement

has been satisfactory. However, the Argentine trade surplus has

dwindled due to rapid import expansion. Real GDP growth has slowed

slightly in Korea and growth in industrial output has slowed

markedly in Taiwan. On July 24, the Philippines signed a Brady-

style debt agreement with bank creditors.

Individual country notes. Mexico's current account deficit

widened to $4.4 billion in the first quarter of 1992 from $1.8

billion in the same period of 1991. This reflected mainly a

widening of the trade deficit. The current account deficit is

likely to exceed $17.5 billion for 1992 as a whole, up from $13.3

billion in 1991.

The capital account surplus narrowed to $5.6 billion in the

first quarter of 1992 from $6.5 billion in the same period of 1991.

Indications are that capital inflows slowed further in the second

quarter, when delays in completing the North American Free Trade

Agreement negotiations and a number of negative reports concerning

the Mexican Telephone Company fueled investor pessimism. This led to

a stock market sell-off in June that was reportedly accompanied by

some capital outflows.

Treasury-bill interest rates rose further in late June and

early July. They leveled off thereafter, as the Bank of Mexico sold

less of the 28-day bills than the amounts on offer at four of the

last five auctions and more of the longer-term bills than the

amounts on offer at eight of the last nine auctions. At the August

12 auction, the rate for 28-day T-bills was 16.9 percent, 244 basis

points higher than in mid-June, while interest rates on longer-term

bills (having maturities of 91 days and over) rose by more than 325

basis points over the same period.

Page 107: Fomc 19920818 g Bpt 219920813

IV-27

With interest rates 5 to 6 percentage points above their March

lows (depending on the maturity of the instruments), banks and

brokerage houses holding large quantities of three- and five-year

bonds had large unrealized capital losses. Many of them had

financed these assets with short-term funds raised abroad and were

forced to realize the losses when the availability of foreign funds

declined. These losses led to a drop in bank stock prices by 20

percent between July 21 and July 27, contributing to a 12 percent

fall in the Mexico City stock market index over this period, but

they do not appear to foreshadow failures of banks or brokerage

houses. Over the last four days of July, the stock market rebounded

by 7 percent, in large part because it was expected that the NAFTA

negotiations would be completed by August 3. However, when no

announcement came, the index dropped 4 percent. After the

announcement on August 12, the index was only fractionally higher.

The CPI rose 0.7 percent in June and 0.6 percent in July, when

it was 15.6 percent above a year earlier.

In Brazil, growing political turmoil is making an already

difficult economic situation worse. Political and popular support

for President Collor has eroded greatly over the past few weeks and

Congress is expected to consider in late August whether to impeach

him. The allegations include influence peddling, Collor's

acceptance of illegal payments from a business associate, and a

cover-up.

Press reports indicate that Central Bank President Gros has

threatened to resign rather than succumb to pressures to loosen

monetary policy, which has been depressing aggregate demand. The

central bank has been attempting to maintain a high interest rate

policy since October 1991. Real interest rates on 28- to 35- day

central bank securities were roughly 4 percent per month the week of

Page 108: Fomc 19920818 g Bpt 219920813

IV-28

August 3, which is very high, even for Brazil. (The high real

interest rates in large part reflect investors' perceptions that the

government will again default on its domestic debt.) Economy

Minister Moreira is under pressure to increase public spending, but

he has denied rumors that he will step down.

Anecdotal evidence indicates that economic activity remains

depressed. According to a private institute, the unemployment rate

in the city of Sao Paulo, Brazil's largest industrial center, was 16

percent in June, the highest level since Collor took office.

Inflation is expected to reach 25 percent per month in September,

compared with monthly inflation rates of 20-22 percent in recent

months, as a result of a scheduled 117 percent increase in the

minimum wage. Stock prices have dropped 30 percent since mid-June.

The cumulative trade surplus through July was $9.6 billion, compared

with a surplus of $7.9 billion over the same period in 1991.

Foreign reserves are estimated unofficially to have been as high as

$19 billion in June; the latest official reserve figure at the end

of April was $15 billion.

On July 9, Brazil reached preliminary agreement with its Bank

Advisory Committee on a Brady-style restructuring package on its

estimated $44 billion of commercial bank debt and on the estimated

$5 billion in interest arrears that have accumulated since January

1991. Under the agreement, creditors would exchange debt for one of

several options, including a reduced interest par bond, discount

bond, a temporary interest reduction bond (FLIRB), and a bond that

offers low interest rates for several years and capitalizes the

difference between 8 percent and these interest rates. There is

also a new money option. Collateral for principal and interest on

the par and discount bonds and for interest on the FLIRBs would be

phased in over a 2-year period after the initial exchange date.

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In light of the uncertainty over when a solution to Brazil's

pressing fiscal and monetary problems will be found, it is not clear

when the initial exchange will take place. Brazil needs to come up

with $3.2 billion for collateral at the initial exchange date; part

of this amount is expected to come from the IMF and other

multilateral sources. However, Brazil did not meet the fiscal

performance criteria under its $2.1 billion IMF stand-by arrangement

over the first two quarters of the year. Discussions between Brazil

and the Fund are on hold until there is a political consensus on

fiscal reform. The price of Brazilian debt on the secondary market

was $0.31 on August 12, down from $0.35 in mid-July.

In Argentina, economic activity surged in the first half of

1992, when industrial output was 16 percent higher than in the year-

earlier period. However, leading indicators suggest that the

expansion is slowing. Consumer prices rose 1.5 percent in July and

were 16.6 percent higher, than a year earlier. In the first five

months of 1992, the trade surplus was $160 million, compared with a

surplus of $2.1 billion in the same period a year earlier. Strong

domestic demand coupled with an appreciating real exchange rate has

led to rapid import growth.

Argentina is arranging to borrow about $3 billion from

international financial institutions and bilateral sources to

finance the collateral needed for its commercial bank financing

package.

On July 20, the IMF Executive Board concluded that Argentina

was performing well under its IMF stand-by arrangement. The

successful review allows Argentina to continue to draw Fund

resources. On July 22, the Paris Club of bilateral official

creditors rescheduled about $2.7 billion in payments falling due

from Argentina through 1995 over 16 years, with four years of grace.

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Korea's GDP rose a revised 7.8 percent in the first quarter of

1992 from a year earlier, slightly higher than real GDP growth in

1991 (Q4/Q4). Inflation continues the downward trend registered

since the beginning of the year; the consumer price index was 7

percent higher in June than a year earlier, down from an increase of

8.1 percent in the year ending January 1992. In the first half of

1992, due to a pickup in exports, the current account deficit fell

to $4.1 billion from $5.5 billion in the same period of 1991.

In early July, Korea widened the band of daily exchange rate

fluctuation from 0.6 to 0.8 percent on either side of the mid-rate

in accordance with its five-year plan to liberalize the financial

sector. The mid-rate is set by the Bank of Korea each morning based

on trading movement and volume of the previous day's interbank spot

trade.

In Taiwan, the industrial production index rose 3.3 percent in

June 1992 from the same period a year earlier, compared with a 6.2

percent increase in the year ending January 1992. Price

developments have been mixed; in June, consumer prices were up 5.2

percent from a year earlier, compared with a 4.3 percent increase in

the year ending January 1992, while wholesale prices appear to be

continuing to fall. Taiwan's cumulative trade surplus over the

first 6 months of 1992 was $5.3 billion, virtually the same as the

surplus over the same period in 1991.

In the Philippines, consumer prices rose 9.2 percent over the

year ending July 1992. On July 24, the Philippines signed a

comprehensive $4.8 billion Brady-style debt package with foreign

bank creditors. Under the terms of the agreement, banks will

exchange $3.6 billion of the country's $11.4 billion commercial bank

debt for a range of new bonds. A $1.3 billion buy-back completed in

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May was also part of the package. The plan is expected to reduce

interest payments by up.to $1.6 billion over the next six years.

On August 10, the government announced that all foreign

exchange controls will be lifted at the end of the month. Exporters

will be allowed to retain 100 percent of their foreign exchange

earnings, compared with 40 percent currently. Foreign exchange will

be allowed to be purchased from commercial banks without prior

approval of the central bank.